Dollars & Details:
Here’s a sign of consumer optimism: household debt in the U.S. has finally returned to totals last seen in the last boom. But this time, it’s very, very different and borrowing has been much more reasonable. Now that the last (very ugly and painful recession) has officially been over for eight years (officially ending in June 2009), it’s time to see what has changed in household finances.
A little history is in order: During the last boom, house prices soared, lending was loose, and consumers often went wild ramping up credit card balances, mortgages and home equity loans, thinking the party would never end. But, it ended with a loud crash, as the recession officially started in late 2007. After the crash, households quit borrowing, and if they still had jobs, people started paying off debt while increasing savings. Consumers were terrified by the economic crash, layoffs and bankruptcies that they saw in evidence all around them. This lack of borrowing was boosted by house foreclosures (wiping out mortgage debt) and the pull back in lending by banks and credit card firms.
Lately, a combination of extraordinarily low interest rates and an improving economy (including a better jobs market) encouraged consumers to borrow again. But, this time they aren’t going crazy with their Visa cards. Instead, they are replacing their old cars that, on average, had become 11 years old, by utilizing low interest-rate auto loans. Other consumers went back to school, entering vast amounts of student debt on a bet that a better education would help them earn higher incomes over the long-run.
Today, total debt is finally back to pre-recession levels. However, revolving debt, including credit cards and home equity loans, are at relatively low levels. Mortgage levels have grown, but not to the insane levels of 2008.
Trends and Theories:
Borrowers turned into savers: Household finances are in much better shape than at any time in the past several years. Booming stock markets and rising home values have boosted total wealth. At the same time, consumers have dramatically increased savings rates.
Apparently, consumers, at one time, were firmly convinced that spending can be more fun than saving—the personal savings rate in the U.S. sank to a dismal 2.5% in late 2007 (numbers are from the Federal Reserve Bank of St. Louis, seasonally adjusted), while consumers partied on, spending and spending. Now, things are much, much different. In March 2017, the savings rate was a more conservative 5.9% of disposable income. Meanwhile, the unemployment rate has sunk to 4.4% in April 2017 from a recession high of 10.0% in October 2009.
Ranks and Results:
Consumers feel on firmer financial footing, but they are not in the mood to shop, spend and borrow like they did in the past. The retail sector is suffering from this reduced spending, but consumers are much better off for the long haul.
All the information you need about this industry can be found at Plunkett Research, including our Banking, Mortgages & Credit Industry Research Center Online, and our just-published, completely-updated Plunkett’s Banking, Mortgages & Credit Industry Almanac, 2017 edition.