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Choosing your data on household debt [ClearOnMoney]
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Choosing your data on household debt

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Commentary

Choosing your data on household debt

8 Apr 2011 by Jim Fickett (eliminated dead link 5 Feb 2013).

Consumer credit is not a core indicator for long-term investors. It is not informative for the overall debt load of the household sector and, regarding the relationship of credit and spending, it is better to focus on spending directly.

Today the Fed released the G.19 Consumer Credit report for February. I have been following this report but, in my never-ending quest to find the minimal set of news topics needed to stay reasonably informed, and having thought over the value of these data, I will no longer do so.

One reason to follow household debt is to track whether the household sector has accumulated excessive debt. The G.19 report is no help there, first, because consumer credit is small compared to mortgage debt and, second, because problematic debt builds up in small subsets of the population – the overall level for the sector is not very informative.

The main reason most news sources follow the G.19 is because consumer credit is, obviously, related to consumer spending. Econoday is typical in reporting the results:

Consumers are keeping a tight grip on their wallets as revolving credit contracted for the 28th time in 29 months, down $2.7 billion in February and making December's $2.0 billion rise a more distant memory. Rising concerns over inflation and weakening confidence in income are limiting consumer activity.

But not so fast! Non-revolving credit is on a seven-month increase, up $10.3 billion in February on strong vehicle sales. Yet the outlook for vehicle sales, and with it growth in non-revolving credit, is uncertain given a decline in unit sales during March and ongoing Japanese supply disruptions this month.

The second paragraph is just plain wrong. All the increase in non-revolving debt, over the last few reports, is due to federal student loan programs, not car loans. I wrote about this before and, to make sure I was not mistaken, checked directly with the Federal Reserve, who confirmed my interpretation. Anyway, if you want to know how auto sales are doing, why would you look at February credit data when you can look at both February and March sales data?

The first paragraph is typical of the main interpretation given to this report in the news – on consumer spending overall. But again, you don't need the February G.19 report, issued today, to tell you whether consumers opened their wallets or not in February – the Census advance report on retail sales for February came out on 11 March, and NIPA data on total household spending for February came out on 28 March.

The main thing is to know is, in fact, actual spending. But one might still want to understand to what extent spending was dependent on credit. In that case, though, it is still not clear whether a superficial analysis of the G.19 report adds value. Different areas of credit tend to rise and fall together:

(Consumer credit is from the G.19 report, mortgage debt is from the Flow of Funds, and both are normalized by household income from NIPA table 2.1. Click for larger image.)

And, further, different areas of credit are to some extent interchangeable. While the ads for consolidating your credit card debt via a new home equity loan are not as common as during the boom, the banks are still doing a regular business in that area. It is possible a detailed, serious study of different areas of credit, and how they are affecting spending, might turn up useful insights. But without that, it is probably enough to just keep an eye on overall credit conditions.

As far as debt in the whole household sector goes, the main thing to know is that we are still in deleveraging mode, and that is clear from the total. I'll be following total household sector debt, quarterly, from the Flow of Funds.