An update on U.S. household debt

One positive development since the end of the Great Recession is that consumers seem to have pulled back on accumulating too much credit and debt. The 2000s were a time when credit appeared to be the force driving consumption in the U.S. economy. But since 2009, the end of the recession, consumption appears to be driven more by earnings than borrowing. Does this mean that households have been staying away from credit?

Earlier this week the Federal Reserve released new data (opens in a new tab) on consumer credit for February of this year. This data lets us know not only how credit and debt have changed in the aggregate, but also the changes in specific kinds of credit for households. In February, consumers pulled back on using their credit cards as balances fell, Eric Morth at The Wall Street Journal reports (opens in a new tab). This is the second month in a row that consumer credit card balances declined (opens in a new tab).

What about mortgage debt that was at the center of the consumption during the last economic expansion? Bill McBride at Calculated Risk presents (opens in a new tab) data on how much equity Americans were pulling out of their homes in the last three months of 2014. During the bubble, many homeowners took out loans (opens in a new tab) to use the equity in their homes to fuel consumption. Yet the data presented by McBride show that mortgage equity withdrawals were negative in the fourth quarter of 2014.

So is consumer debt on the decline? Well, if you look at the total amount of debt, it actually is on the rise. Ivan Vidangos, a senior economist at the Board of Governors of the Federal Reserve System, posted an analysis (opens in a new tab) of household debt looking at its recent trends on Monday. He shows that overall levels of consumer credit climbed in recent quarters, but that increase in debt has been slower than the increase in disposable household income. So the debt-to-income ratio, a measure of how leveraged households are, is actually on the decline.

There are two types of consumer credit that have been the main drivers of consumer credit growth since 2009, according to Vidangos. The first is auto loans. The strength of auto loans might explain why the growth in consumption of durable goods, including cars, has been in line with historical trends (opens in a new tab) compared to the weakness in other kinds of household consumption. One concern about the increase in auto loans is that many of these loans appear to be subprime (opens in a new tab).

The other main driver of consumer credit has been student loans. The increase in student debt precedes the Great Recession, but it has continued to increase throughout the current recovery. While we have data on the aggregate amounts of student debt, in many ways we are flying blind when it comes to this large section of household debt. Susan Dynarski, a professor at the University of Michigan, writes (opens in a new tab) at The Upshot about the lack of data available to analysts when it comes to student debt. Given this lending category’s now more central role in consumer debt, this is a problem that needs to be solved quickly.

Debt doesn’t seem to be as central to consumption as it was during the housing bubble. Nor is it growing as quickly. But this isn’t a reason to ignore the current debt dynamics. These trends today may not be as consequential to the macroeconomy, but understanding them will give us a better indication of the economic situation of U.S. households.