Thursday, August 13, 2009

Consumer Debt In A Historical Context

Many economists project a slow recovery from this recession, as consumer spending, which makes up more than two thirds of the economy, is not expected to rebound any time soon. On what basis are economists making these projections? Mounting job losses are a major reason why consumer spending is not expected to be strong, and serves as a risk to the economy going forard as we discussed here. Another reason is that consumers have started to reduce their debt levels (i.e. rather than spending, they are saving).

Last Friday, the Federal Reserve reported that consumer debt levels continued to fall in June. While this de-leveraging of the consumer has been occurring for several months, it still has a long way to go from a historical point of view. The following chart illustrates how consumer debt levels have evolved over the last 70 years:

Clearly, consumer debt levels are quite elevated in a historical context, despite the recent well-publicized reductions. This indicates that there could be more debt reductions in store, which would reduce the consumer's ability to spend.

Will consumer debt return to the levels that they were in the year 2000, when the last recession took place? Nobody really knows. But investors should ensure they are prepared for debts to continue to reduce, by owning companies with flexible cost structures.


PlanMaestro said...

Agree with your point, but I would have liked that figured indexed by GDP or personal wealth.

Saj Karsan said...

Yes, that would be more useful.

Next time!