Americans Are Shedding Debt, Will They Spend?
The gigantic debt burden left over from the financial crisis has been one of the biggest obstacles to economic recovery. The latest data from the Federal Reserve suggest that U.S. consumers might finally be getting out from under it.
The aggregate assets of U.S. households stood at $88.4 trillion as of June 30, up from $69.7 trillion in the darkest days of 2009, according to the Fed's financial accounts report. Those assets are worth 6.5 times what households -- a category that includes hedge funds, private equity firms and nonprofit organizations -- owe on mortgages, credit cards and other forms of debt. The ratio of assets to liabilities is the highest since early 2002.
The rebound in the household balance sheet comes thanks to a combination of debt relief, prudence and luck. Rising stock prices and a recovering housing market made the largest contributions to the increase in assets. On the liability side, mortgage debt has fallen some 12 percent from its peak in early 2008, as banks have written off bad loans and some borrowers have paid down balances.
Whether U.S. consumers -- whose expenditures account for about two thirds of the country's gross domestic product -- will feel good enough to go out and spend again, though, remains to be seen. Growth in consumer spending has so far been much slower in this recovery than in previous ones. The job market has been horrible, and given the market gyrations of the past decade or so, consumers might see financial wealth as more ephemeral than they have in the past.
Perhaps more importantly, homeowners still have little equity in their properties, even after the recent rise in house prices. On average, equity as a share of home values stood at 49.8 percent as of June 30, up from a low of 36.7 in early 2009 but still well below the 10-year pre-crisis average of 58.3 percent. According to data provider CoreLogic, 7.1 million homes still had negative equity in the second quarter of 2013, meaning their owners owed more on mortgages than the houses were worth. If those people have been responsible enough to keep paying their mortgages, they'll probably channel any added income toward paying off debts rather than going to the mall.
More broadly, the country's finances leave much to be desired. Total credit to the private sector -- that is, to households and businesses -- stood at 156 percent of gross domestic product as of June 30. Researchpublished by the International Monetary Fund suggests that private credit becomes a drag on economic performance when it exceeds 100 percent of GDP, because the level of debt makes the economy more vulnerable to crises. Interestingly, the U.S. crossed the 100 percent threshold in 1984, the year the government undertook what was then its largest bank bailout ever -- that of the Continental Illinois Bank and Trust Company.
Excessive debt impairs governments' ability to provide stimulus in difficult times, makes financial systems more fragile and leaves people vulnerable to dips in income. So even if rising net worth prompts U.S. consumers to start spending again, the country as a whole has a lot of deleveraging to do.
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Mark Whitehouse at email@example.com