Wednesday, July 1, 2009
Janet Yellen made waves last night, as she was very negative on the US consumer. She said this in her speech,"I also think that a massive shift in consumer behavior is under way—one that will produce great benefits in the long run but slow our recovery in the short term."
Through Yellen's speech, I would like to re-iterate this for the millionth time (here, here, here, etc.): the operative word in this quote is "think", because nobody knows whether consumer saving return to its now-heralded levels in the 1970's and 1980's, remain at its current non-fiscal stimulus level (something below 6.9%), fall slightly to the 4-5% range, or even go back to 0% (unlikely).
Regulation and fiscal policy are severely distorting the data. Notice that households paid down (defaulted on) consumer debt in Q1 2009, not mortgage debt. This perfectly coincides with recent regulations on the credit card industry (see LA Times article below).
The chart illustrates total residential mortgage and consumer liabilities as a share of total household debt, which is constructed as liabilities not attributable to nonprofit organizations, as reported by the Fed's Flow of Funds B.100 balance sheet. In Q1 2009, the consumer share fell 0.4% to 19.3%, while the mortgage share grew 0.5% to 79.9%. In Q1 2009, debt reduction was focused on the consumer credit side.
Over the year, consumer and mortgage debt are falling. What could be causing this?
Defaults? Yes. Bank charge-off rates are rising quickly across all loan types, except commercial mortgages; and delinquency rates are through the roof. However, the consumer credit delinquency rate in Q1 2009 rose 11% since Q4 2008, while that for residential mortgages grew 24%. From that, one would surmise that mortgage debt should be falling faster.
Consumers are actively paying down credit? Probably (definitely). All types of consumer credit (auto loans, student loans, credit cards) have been falling according to the the Federal Reserve's monthly G.19 statement. However, much of that is on the revolving side (credit cards). And for how long will that last? That all depends on income growth.
Standards are worsening? Yes, anecdotally. Today, the LA Times is running an article about Chase increasing credit card holders' monthly minimum payments by more than 100%:
Van Nuys resident Richard Levinson figured he was getting a pretty sweet deal when JPMorgan Chase & Co. offered to charge an average 4.5% in interest if he'd transfer his outstanding credit card debt to the bank.When I read articles like this I wonder if household saving behavior has indeed changed. It could be that households are just planning to default when needed, pay down credit when forced to, and wait for better days. I just don't know. But I suspect that government regulations (credit cards) and incentives (Obama's insistence on refinancing troubled mortgages) are severely distorting the data.
Levinson, 54, a musician, planned to use the Chase account as a rainy-day fund that would cost relatively little to maintain.
"I work in an industry where I can never be sure of my income," he told me. "This provided me with cash at an interest rate that was guaranteed for the life of the loan."
Now Levinson finds himself among about 1 million Chase cardholders who have been notified that their monthly minimum payment will more than double in August to 5% from 2%.
"They're essentially calling these loans," he said. "They either want their money back or they want to force people to default so they can charge rates closer to 30%."