Consumer Debt Narrows, Consumer Still Struggling

Total consumer debt continues to narrow. That’s the good news.

Total consumer debt in the second quarter fell to $11.38 trillion, according to the New York Fed’s quarterly review, down 0.5% from the first quarter ($11.44 trillion).

The narrowing was driven by home loans, and that’s where this little bit of feel-good news starts to break down. The balances on home-equity lines of credit narrowed by $23 billion in the quarter. Excluding mortgages and HELOCs, consumer credit increased by 0.4%, to $2.6 trillion, driven mainly by student and auto loans.

It’s certainly good that consumer debt is narrowing. But it’s troubling that the single-biggest component of this remains charge-offs due to mortgage foreclosure and default – not a sign of a healthy consumer.

That’s made clear by some of the data in this post from the New York Fed’s Liberty Street Economics blog. The single-biggest contributor to the narrowing of consumer debt (and narrowing seems the more accurate word when talking about debt; we’re talking about negative numbers, not positive. Debt doesn’t “slide,” or “fall,” it narrows. We’re still more than $11 trillion in the hole, people) remains household foreclosure and default. In 2011, mortgage charge-offs totaled $303 billion. That’s less than the $357 billion in 2010, to be sure. But this category sat at $41.3 billion in 2006.

While total household wealth is rising (thank you, U.S. stock market), median wealth has taken a big hit, and it’ll take years of real economic growth (whenever it decides to show up) to make up for everything people have lost since 2007.

Also, what would make this trend of narrowing overall debt really something to celebrate would be if incomes were rising as well. Then you might be able to discern a day when consumers are actually seeing their positions improve, and we could all start dreaming of that time when economic growth will be self-sustaining. But all indications are that wages are barely keeping up with inflation.

The bottom line is the consumer’s position is not improving materially, which means pressure is going to remain on the federal government and the Federal Reserve to keep propping up the economy, no matter who wins the election in November.

Paul Vigna

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