Friday, April 3, 2009

McKinsey on the delevering household

McKinsey Global Institute wrote a really nice piece on the recent accrual of consumer debt, and how the consumer delivering process might play out during the recovery (download it here). The main point of the piece is: that in lowering the consumer burden – debt to income ratios – it matters very much how income behaves during the economic recovery.
  • If income remains unchanged, to reduce debt-to-income by 1% requires almost 1% more of personal saving, or a >$100 billion draw on spending (consumption).
  • But if income is rising, then household debt-to-income can fall with less give on consumption because consumers save less (see exhibit 12 in the paper).

McKinsey paints a really nice picture of the boom in household spending during the 2000-2007 period, fueled by home equity extraction (due to strong appreciation in home values), falling saving rates, and asset appreciation. Consumer spending was big – 77.3% of total economic growth from 2000-2007.

All charts are directly from the McKinsey report.
Households fueled spending habits through home equity extraction, amassing a lot of consumer debt along the way.

And who accrued the bulk of the debt? According to McKinsey, the top fifth of the income distribution accounted for nearly half the debt growth.

There is also a really nice discussion of wealth effects that I’ll leave for you to read. Update: Reader Ron tried to get the paper and had some difficulty. You must register, which is free, at the McKinsey website in order to access their materials. Totally worth it, though. There is a wealth (no pun intended) of information there.

Rebecca Wilder

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