The Household Debt Mountain

We are in a transition period right now in which both official & natural optimism about the economy are giving way to grudging acceptance of grim realities. Both John Mauldin and Mike "Mish" Shedlock are quoting bearish economist Dave Rosenberg, who believes he has confirming evidence that the "Great Recession" is still with us—

Our suspicions have been confirmed — the recession never ended. Macroeconomic Advisers produces a monthly U.S. real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008. The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the 'build in' for Q3 is -1.5% at an annual rate.

Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the M.A. monthly data, is still 2.5% below the prior peak. To put this fact into context, the entire peak-to-trough contraction in the 2001 recession was 1.3%! That is incredible.

"Interestingly, and dovetailing nicely with our deflation theme, nominal GDP fell 0.3% in May and by 0.4% in June. This is a key reason why Treasury yields are melting."

There must be many reasons why the NBER—the official arbiter of Business Cycle expansions and contractions—never called the "all-clear," but for ordinary Americans, and the economy as whole, the Household Debt Mountain explains why the recession never ended. The text and graph below are from the New York Fed's Quarterly Report On Household Debt And Credit (August, 2010)—

Aggregate consumer debt continued to decline in the second quarter, continuing its trend of the previous six quarters. As of June 30, 2010, total consumer indebtedness was $11.7 trillion, a reduction of $812 billion (6.5%) from its peak level at the close of 2008Q3, and $178 billion (1.5%) below its March 31, 2010 level.

The number of open credit accounts continued to decline, although at a somewhat slower rate, during the quarter. About 272 million credit accounts were closed during the four quarters that ended June 30, while 161 million accounts were opened. The number of credit account inquiries within six months – an indicator of consumer credit demand –ticked up for the first time since 2007-Q3. Credit cards have been the primary source of the reductions in accounts over the past two years, and during 2010-Q2 the number of open credit card accounts fell from 385 to 381 million. Still, the number of open credit card accounts on June 30 was down 23.2% from their 2008-Q2 peak.

Household mortgage indebtedness has declined 6.4%, and home equity lines of credit (HELOCs) have fallen 4.4% since their respective peaks in 2008-Q3 and 2009-Q1. Excluding mortgage and HELOC balances, consumer indebtedness fell 1.5% in the quarter and, after having fallen for six consecutive quarters, stands at $2.31 trillion, 8.4% below its 2008Q4 peak.

The Household Debt Mountain. If we get serious deflation down the road, the debt mountain will grow in real (inflation-adjusted) terms.

You don't have to be a Rocket Scientist to see that—

• Comparing the real GDP graph and the Household Debt Mountain, each $100 billion dollars of additional GDP required that Americans take on more and more debt. 


• The "de-leveraging" process (Fed data) during which Americans must shed their excess debt has still got a long, long way to go. See my older post Keynesian Delusions. And now about 18% of Americans are underemployed according to the Gallup polling, which makes matters much worse.


• Therefore, and all other things being equal, GDP growth is not possible as households offload debt.

In the real world, not all other things are equal. The soon-to-be-temporary rise in GDP (first graph) was primarily due to two factors: 1) Obama's stimulus package and 2) a long inventories "rebuild" which anticipated a typical "V-shaped" recovery. See my recent post Welcome To The Recovery!

But that's all over now. So the growth we saw in late 2009/early 2010 was an illusion. Neither the public nor the private sector will be able to jack GDP up now. For the optimists, there's no place to run, no place to hide.

How did so many people get it wrong? By and large, the "analysts" you read, hear on the radio or watch on TV are idiots, fools or charlatans, but I'll concentrate here on the idiots and fools. It's not so much that these "experts" are unintelligent or ignorant, although they sometimes are. The real problem is that they're totally confused. A typical "analysis" of the economy is a jumbled amalgam of various biases, self-interest, rigid beliefs, wishful thinking, character flaws, denial etc. I can count the number of analysts I really respect on both hands & feet, and still have some fingers or toes leftover. The analysts I quote approvingly over & over again are the ones I respect.

I just had to get that off my chest.

So where does this leave us? For the foreseeable future, economically speaking, we are up shit creek without a paddle. Who knows? Maybe The Rapture will occur. Maybe space aliens will land near the Washington Monument. Maybe Elvis never did leave the building. Maybe Israel will bomb Iran. In the absence of Miracles, Black Swans and Human Folly, keep your eye on the Household Debt Mountain if you want to know what's going on.

And there's always that Public Debt Mountain, which I have not touched on today

Comments

[Bill Mcdonald]

IT makes you wonder if the big reduction in consumer household debt is via paying the balances with cash or wiping them out in bankruptcy. Same with the mortgage indebtedness except via foreclosures.

Re: if Americans are paying off the debt with their hard earned cash and if the unemployment trend continues in its' direction, plus credit card companies keep lowering limits, LOOK OUT BELOW!