Credit Growth and Household Debt Burden

Last month we reported that consumer, non-mortgage borrowing had accelerated sharply over the past 9 months, despite a series of interest rate hikes by the Federal Reserve. Revised statistics released by the Fed in early August reveal that consumer installment borrowing last spring was even stronger than previously thought, and continued into June at a 9.9% annual pace. Revolving credit slowed from the double-digit growth rates exhibited through May, rising in June at a moderate 7.0 % annual rate. As of the end of June, consumer installment credit outstanding was $1.465 trillion (seasonally adjusted), of which $632 billion was revolving credit. Total consumer installment credit includes auto loans, credit cards and other personal loans but excludes first and second mortgages and other loans secured by real estate.

The persistent growth in non-mortgage credit has been surprising; although signs have begun to emerge that the pace will soon moderate. Commerce Department data show that real Gross Domestic Product grew by 5.2% in the second quarter, well above analysts' expectations. However, consumer spending grew at only a 3% annual rate, the slowest pace since 1997 and less than half of the 7.6% growth rate in the first quarter of this year.

Although moderated by increases in personal income, the brisk growth in consumer debt has produced a noticeable rise in consumer debt payment burdens over the past year. In the accompanying chart we compare two estimates of consumer payment burden on non-real estate debt calculated through the first quarter, 2000.

The Federal Reserve Board had developed a procedure that estimates aggregate scheduled debt payments using data on amounts of outstanding debts of various types, age of the stock of outstanding debts, and average interest rates and terms to maturity for debts of different ages. It then calculates a measure of debt service burden by dividing aggregate scheduled debt payments by aggregate disposable personal income. The chart indicates that the Fed's debt service burden measure was rising slowly (1-2% annual pace) but steadily since the fourth quarter of 1998, but accelerated to about a 4% annual pace by the first quarter 2000.

Printer-Friendly Chart

An alternative and more accurate measure of consumer debt service burden can be calculated using Trans Union's TrenData database. TrenData contains the sum of individual installment loan payments that are contained in Trans Union's credit reporting files, eliminating the need for estimating the size of payments based on type of loan and assumptions about interest rates. Of course, payments on revolving credit typically are not captured in the credit files, but these are estimated as 2.5% of revolving balances, which is the same assumption used by the Federal Reserve in its calculations. Unfortunately, these data are available in TrenData only since the fourth quarter of 1998, so year-over-year comparisons, by quarter, are available beginning only in the fourth quarter of 1999. Still, for both the fourth quarter, 1999 and the first quarter, 2000 the chart shows much more rapid change in consumer debt service burden than was indicated by the Fed's aggregate estimates. During the first quarter of this year, non-mortgage debt service burden increased by nearly 16% over the same quarter the previous year.

Although the sharp increase in non-mortgage debt service burden may appear alarming, we should quickly reiterate the message we've emphasized in previous issues. Mortgage borrowing has slowed sharply in recent quarters due to rising mortgage interest rates. Also, personal incomes have been rising steadily as the economy keeps humming. Consequently, mortgage debt per borrower was a slightly smaller percentage of disposable personal income per adult in the first quarter of 2000 (110.9%) than was the case in the first quarter of 1999 (113.1%). Because mortgage debt outstanding is nearly 4 times larger than total consumer installment credit, its slowing has offset to some degree the rapid growth in non-mortgage balances. Also, periodic household surveys conducted by the Federal Reserve Board show that the vast majority of aggregate debt is owed by middle and high-income consumers who generally have low debt-payment burdens and also own financial assets that could be liquidated to repay debts. Thus, the risks to the overall economy from rising consumer debt burdens do not appear alarming at this point, though they are rising.