Consumer debt comes in two types: revolving and non-revolving.
Revolving debt includes debt that is paid off each month, such as credit card debt.
Non-revolving includes financing for things like education, cars, boats, mobile homes (but excluding real estate), and things like vacations – “big ticket” items which one may expect to pay for over a term of several years.
These two types of short-and-intermediate-term credit represent what is called “consumer debt” –literally, the financing of our way of life as Americans. The way we spend tells a lot about how we feel about our economy and financial situation. Consumer spending has a great impact on economic growth.
What are the latest statistics?
Federal Reserve figures show that, over the last few years, Americans have become more cautious about assuming more credit card debt. Revolving debt reached its peak in late 2008, at $989 billion, representing an average of over $8,000 per household. [1]
During the recession, revolving debt fell to $779.6 billion in the first quarter of 2011. By February 2012, it increased to $798.4 billion, still well below 2008 levels.
In contrast, non-revolving credit has steadily increased. Federal Reserve figures show a total of $1,605 billion in 2008, increasing to $1,690 in December of 2011. During January and February of this year, non-revolving credit rose to $1,723.8 billion.
Taken together, total consumer spending in 2008 was $2.594 billion; in February 2012 it was $2.519 billion, a 3.1% change.
What does this mean for the consumer?
To get a clearer perspective, one must look at the rise in consumer debt over the last 20 years, since the recession year of 1990. From 1990 to 2008, revolving debt climbed steadily upward, more than quadrupling from $217.9 million in January of 1990, to $989.1 in December 2008.
For the first time in twenty years, Americans are paying down their revolving debt and not borrowing it back. Consumers are not fully secure with the direction of the economy and are not yet ready to take on more unsecured debt.
What about the future?
Economists do see hope for the future. A year ago, Teresa Chen, an economist at Barclays Capital, advised that the fact that consumers were choosing to borrow for “bigger ticket items” could point to continuing economic improvement. Chen added, “The persistent increase in headline consumer credit is a positive development, consistent with the broader economic recovery.” [2]
This prediction appears to be on the mark. One positive sign is the improvement of delinquency rates on cards. David Nelms, CEO at Discover financial Services, advised last fall of “continuing improvement in credit, as our delinquency rate in cards reached a 25-year low at 2.43 percent. And for the first time since 2007, our card net charge-off rate dropped below 4 percent.”[3]
Whether credit card debt has reached a plateau and will level off, or whether it will again start climbing is anyone’s guess. Jobs, the economy, and daily living costs will help decide future trends.
[1] http://www.federalreserve.gov/releases/G19/Current/
[2] http://susanlipston.com/wordpress/2011/04/12/economic-update-for-the-week-of-april-11-2011/
[3] http://www.bloomberg.com/news/2011-10-07/u-s-consumer-credit-fell-9-5-billion-in-august-biggest-drop-in-a-year.html
