Tuesday, June 15, 2010

Q1 Charts of Total Borrowing: Involuntary Deleveraging via Defaults, or Frugality?

I've been tracking the borrowing trends from the Z.1 Federal Reserve Flow of Funds report since last summer. Here is the Q1 2010 update:

Total US Government and Private Sector Borrowing Relative to GDP (Quarterly 2003 - 2010/Q1)

(click on graph for a larger version)

The contraction in private sector borrowing (yellow line) appears to be in a declining trend. Total borrowing (combined private and public sectors) has gone marginally positive!

US Borrowing by Sector (Quarterly 2003 - 2010/Q1)

(click on graph for a larger version)

The largest component of the private sector is the financial sector, and its contraction in borrowing (purple line) has been getting smaller, though at a slower rate. Notably, business borrowing (dark green line) was roughly flat in Q1 after contracting for four consecutive quarters. But home mortgage borrowing is contracting faster than before.

What best explains the private sector's negative borrowing rate? And why is the rate of decline getting smaller? In my last update I linked to some data that suggested "consumers haven't actually been paying down credit card debt since Q1 2009 — they've actually continued to add to debt, whether out of necessity or choice — so the overall contraction since then has been all due to charge-offs." Credit card debt is only one kind of borrowing, but it is likely correlated with consumer attitudes toward debt and therefore future trends in borrowing.

Edward Harrison, always a worthwhile read, is continuing to question whether consumers have really found frugality. In his latest post on the topic, he concludes: "Bottom line: people don’t change unless they are forced to do so. Americans are as spendthrift as ever. Wait until the economy hits a rough patch – and then we can talk about the demand for credit."

Many other commentators (myself included) have tended to assume that consumers are becoming more frugal after being burned by debt-driven asset bubbles and would both choose to incur less new debt and to pay down existing debt faster than before. This is the multi-year deleveraging process that so many expect. There is evidence to suggest this is occurring, but also conflicting evidence suggesting that defaults, not voluntary repayments, explain the primary trend. Understanding this dynamic is key to understanding likely economic outcomes and whether this is truly a non-temporary balance sheet recession as described by Richard Koo. Thoughts? Evidence I've missed?

New developments can of course change current attitudes and behaviors. Household wealth stands a good chance of declining again due to (a) a resumed decline in housing prices as the effects of the absolutely enormous government support for the housing market diminish somewhat, and (b) potential further drops in stock prices (more on that another time). Might lower asset prices (and especially directionally declining asset prices) lead to an increased frugality?

It would be tremendously useful in understanding macro trends to have government data like we have now in the Z1 and other reports, but disaggregated into various household wealth and income tiers. Such data could go a long way to distinguishing between trends driven by economic stress versus trends driven by choice. Unfortunately I don't know of any source of such data (and it would likely by necessity be collected from small sample sets, anyway).

No comments:

Post a Comment