This would be how they manage to be "surprisingly resilient to recent economic shocks" as mentioned in the previous thread. At some point soon, things are going to go all nonlinear.
Another interesting chart - Personal Income (red) vs. Consumer Credit (blue). The consumer credit numbers are not in there yet, so it should be a little higher, but still well below income growth.
The great tension on this blog now is between two scenarios:
1) The housing bust is a tiny non-event in the midst of the great American economy, the greatest juggernaut in the history of the world.
2) The housing bust is, in itself, a big deal, and, in the larger context of the tapped out American "consumer", is the death knell of the American juggernaut.
Right now, with the indices penetrating new highs every day, scenario 1) is in charge.
Okay, CR and Tanta, this is YOUR blog. Tell us which it is:
The indices are irrelevant to the discussion. At this point, they're sheer speculation.
Major financial corporations are declaring major losses, and yet their stocks are going UP. Since when did lower earnings correspond to a higher value? Welcome to The New Economy Redux, where valuations and fundamentals no longer matter (again).
And the mortgage market was a market that saw incredible growth that defied all predictions of a bust. Until it stopped growing, and has since been falling apart in rather spectacular fashion. There's absolutely no indication that consumer credit is somehow magically different or will follow a different path.
When consumer credit starts to drop I'll start listening to the "U.S. Economy: Greatest Story Never Told" line, but as long as the savings rate is negative, we're in trouble.
I find, nowadays, that this blog must be read in conjunction with Accrued Interest.
Not because Accrued Interest is a genius, but rather because he is a bull outside the housing sector.
Or, at least, he was.
Now, he seems to be turning.
That, to me, is exceptionally frightening, because he's turning at exactly the moment when the consensus appears to be that all is well and that only nuts commenting on CR are in a bearish frame of mind.
arbogast, the ongoing and deepening housing bust is a BIG DEAL. But I don't think - and I've never thought - it was the "end of the American juggernaut". Slow growth or a mild recession were what I viewed as the two most likely scenarios - and that is what has happened.
In trying to pick between those two scenarios, I believe Steve is arguing for sluggish growth. I'm still leaning towards a mild recession. Not much between us as far as I can see.
The people that are way off are the Bear Stearns types (until recently) that saw booming growth, and the big "D" Depression advocates - at least so far.
Steve, I think credit card debt (as the title of the post implies) is increasing faster than wages. Credit card debt was up 8.1% in August (annualized) and 7.4% in July. Over that same period (end of June to End of August), wages were up 3.5% annualized. All nominal - and not even close.
"Steve, it just never occurs to you that those experiencing the income growth are not the same as those with the growing consumer credit balances." [tj and the bear]
Exactly! What type of labor is in high demand? It doesn't make any sense unless you factor in the Mozillo's of the world who have done very well in recent years...
Best case scenario is that profit growth levels off.
"Steve, I think credit card debt (as the title of the post implies) is increasing faster than wages. Credit card debt was up 8.1% in August (annualized) and 7.4% in July. Over that same period (end of June to End of August), wages were up 3.5% annualized. All nominal - and not even close." [CR]
Thank you, CR. I knew that Steve's numbers didn't smell right, as least as far as consumers being able to afford higher credit card balances. Sometimes you have to use some common sense.
Speaking as a big "D" depression guy, I haven't seen anything yet to suggest we're not still on track for one. The depression's scheduled for 2009, not tomorrow.
I believe there is a big dichotomy in the economy. Group of people (I think it is 33% of US households, like myself) who has paid off their mortgages and dont have any debt at all, because it is their style. And another 67% who are in debt up to their eyeballs and mostly are upside down on their mortgages.
My point is that those people who are in trouble are truly are in a big trouble. I believe once we are done with this housing/debt episode we are going to have bigger economical gap between haves and have nots.
I received my most recent American Express Blue bill the other day and included in the bill was a notice of a change in terms. If you pay ONLY the minimum payment, they have the right to increase the minimum payment in each subsequent month. It doesn't mean anything to me as I never carry a balance, but this sounds like AMEX is preparing for an event in the near future in which they need to boost monthly revenue. I wonder if Visa or MC will follow suit.
Steve, I think credit card debt (as the title of the post implies) is increasing faster than wages. Credit card debt was up 8.1% in August (annualized) and 7.4% in July. Over that same period (end of June to End of August), wages were up 3.5% annualized. All nominal - and not even close.
In Q2 of 2006, revolving credit was up 8.9% annually. The world didn't end. And why does only credit card debt matter? If we're trying to evaluate the health of the consumer (I assume that's what we're doing), shouldn't you look at total debt and ability to pay it back (income).
If you include interest payments, debt increases at the rate of inflation (at least). Adjusting InterestOnDebt plus debt for inlation will give you back debt.
Therefore i feel debt should not be adjusted for inflation but on the other hand (income minus savings) should be adjusted for inflation. Savings part of the income should not be adjusted.
Steve, no matter how we cut it, consumer debt will not offset the decline in MEW. It isn't even close in total dollars. MEW was still very strong in Q2, and several research papers have suggested that MEW is spent over several quarters - so the big question is will the coming decline in MEW slow consumer spending?
The fact that people have started running up their credit card debt as MEW declines is interesting (and fun to watch since dryfly predicted it would happen) - but it really is small compared to MEW.
But if you want to look at total consumer debt, it is up 5.4% annualized over the two month period (end of June through August) - compared to wages up 3.5%. This is the period we are interest in because this is when we expect MEW to start declining rapidly (because of tighter lending standards).
Once again, this can offset a small portion of the decline in MEW - but only a small portion.
If we're trying to evaluate the health of the consumer (I assume that's what we're doing), shouldn't you look at total debt and ability to pay it back (income).
CR has blogged about it here. They are close to all time highs, but seem to be improving in the last couple of months.
The problem with FOR ratios is they don't tell the micro story. The fact that household A has FOR of zero does little good for household B with a FOR of 50% when bills come due.
Kicker, that is a key problem with aggregate statistics. Some groups of U.S. households are already in deep trouble - just look at the record foreclosure activity. Other households are experiencing strong growth in income.
The key is to be in the 2nd group!
tj & the bear, a severe recession is possible - but it seems unlikely to me, at least in the near term (say through '08). That doesn't mean it can't happen, but I think sluggish growth or a mild recession are more likely. I just don't see the job losses happening that are necessary for a severe recession.
It is pretty easy to project the unemployment rate rising to 5.5% or 6% - but a severe recession means 8%, 9% or higher. I just don't see it.
I agree that MEW will decrease. I just don't think it's as crucial to consumer spending as you do.
Honestly, looking at this chart and this chart, I'm a bit puzzled why you consider it so important. I don't see much of a correlation between MEW and either real or nominal PCE.
If yoy income + debt are 7% and 5% respectively (per Steve), then it would seem that most of the new debt is being used for investment (since yoy consumer expenditure is much less than 12%). As long as the investments are doing fine (return greater than debt servicing) there is no problem.
It isn't the level of the debt or its rate of increase, or whether that rate of increase is less or more than the rate of income that is the issue in and of itself, but the cost of servicing that debt and whether that is manageable. It matters what the base is upon which the increase of 5% of debt is calculated. If my debt is equal to my income and I add 5% to it, no problem. On the other hand if my debt is 10x my income and I add 5%, then maybe a problem.
lama - the price of natural gas??? It is CHEAP by any other measure. These current values are the reason why drilling numbers are beginning to slide. That being said, it is commodity that is in very short supply (long term) given the current and forecasted demand.
Given the low price of natural gas and the recent changes to certian royaly structures have caused a huge fall off on investment, in Alberta Canada.
So what - guess where a good % of US (secure) O&G supply is from...Alberta of course.
Barley, a joke with little data analysis. I assumed the prices were as last year. For the summer months, my bill is so low I wouldn't notice the unit cost.
You gave me good news. Thanks!
Fascinating equities market! There were 110K jobs added last month according to BLS, worth probably $300M/yr in income and wall st probably added $20T in share value on it today alone. Talk about leveraging. Amazing.
If yoy income + debt are 7% and 5% respectively (per Steve), then it would seem that most of the new debt is being used for investment (since yoy consumer expenditure is much less than 12%)
It's also possible that new debt is being used to make interest payments on old debt.
Once a household starts rolling payments from one credit card to another it's pretty much a given they are headed to bankruptcy.
I've had a few friends and co-workers who've gone down that path. In every cases, they were oblivious to it until a month before they found themselves in bankruptcy. The final collapse was usually triggered by a minor event that caused them to miss a credit card payment (car trouble, doctors bill, etc).
All at once, nobody was willing to extend them new credit and interest rates on their cards usually doubled (universal default). Other than bankruptcy or winning the lottery, there was no way out.
Funny thing is, even after the bankruptcy they never really grasped what happened. They'd always talk about it as if the emergency room visit or the "lemon" they were sold was the reason they were "forced" into bankruptcy. The fact that they were living beyond their means for almost a decade never enters their mind.
This time around, they are going to be in for even a bigger shock. The changes in bankruptcy laws aren't going to allow many of them to just shake off the debts like they did in the past.
Some day, people are going to say that the recession of 20XX was longers and more painful than it needed to be because of the bankruptcy law changes that were pushed through by the credit card companies.
Dan,
Financial Services is booming right now. In my little consulting firm, we could all work as many hours as there are in a week. Other CPA's tell me the same thing.
Aside from my own field, I can only look at the same published data you can.
Let's say income was growing at an absurdly incredible rate of 100% per year. And let's say that simultaneously consumer debt is growing at a (relatively) reasonable rate of 10% per year.
So does this comfortable cushion tell you anything about whether the consumer is tapped out? Wouldn't it be of some concern that his debt is growing at all!?? If he is consuming at a rate greater than his income is increasing, there's still cause for concern, isn't there?
I think it depends on how he is managing his income, and what he is using that debt to purchase.
Thanks lama! I'm glad for those in your profession, and that makes sense to me, as a lot of people do have savings and the tax laws and financial markets have become more complex...
That being said, it is commodity that is in very short supply (long term) given the current and forecasted demand.
I noticed that the natural gas powered Honda Civic GZ NGV could be refueled for about $1.50 a gallon (gas equivalent). It's not going to take many years of high oil and gas prices before natural gas comes to parity with gasoline on a cost/calorie basis.
The last time I saw cost per calorie disparities like that was when I read about people heating their home with corn stoves because it was cheaper than heating with natural gas. Didn't take long for corn to catch up in cost/calorie.
Speaking of energy, it seems that the Saudis can't increase oil production like we thought they could. So maybe the peak oil people are on to something.
"The Economist" just dismissed the current high oil prices as OPEC being greedy, but you have to wonder if they (OPEC) have really become more disciplined or if they just don't have much spare capacity...
I think the concern with the demise of the ATM aka MEW is along the lines that over the last few years a substantial portion of GDP growth was attributed to this funding source. In it's absence it is postulated that it will no longer be a significant contributor to GDP growth. Seems intuitively obvious to the most casual observers. No?
After credit card debt, we have PayDay loans, then pawn shops, then Tony Soprano. I figure that gives consumers 12-16 months before they have to actually start worrying about paying for all this.
There may be something to Steve's income increases angle. It has nothing to do with income increases outstripping debt burden increases since the absolute debt increases in CC balances don't address the 20% rates lumped on top of all that increasing debt. That's a nuclear chain reaction eaiting to happen.
But, think about this at a micro level... If my income increases 5%, my increase is actually probably triple that if I decide to level it up on credit. So I can spend myself into BK even faster, if I were so inclined!
Right, Bobby. Some here (Steve) just post numbers & graphs. Others (me) just bloviate (-; We need to strike a balance, with common sense playing a role.
I just saw a video on Bloomberg. It was Econ professor Peter Morici from the University of Maryland talking about the employment data. He sees a contraction of high paying U.S. jobs.
Jobs in goods producing industries contracted by A LOT (emphasis in original (-: ). More jobs in the lower paying service sector. Lower construction employment is now spreading to non-residential area (commercial real estate). Government spending is up, but government spending on infrastructure is down.
He says that the odds of a recession are about 45%, and that it depends upon CRE. Consumer spending has been up this quarter, but not back up to levels of 2006 and 2007Q1.
So that kind of backs my theory that we keep slowing down and there is no end in sight. Yes, the bottom hasn't fallen out yet, but the outlook is for slower growth moving into recession and possibly depression...
GDP is reported on aggregate, right? Recessions happen when income, employment and sales decrease on aggregate, right?
True, but irrelevant to my point. If you're standing in a room with Bill Gates the aggregate looks pretty good, but you're still no closer to buying a Ferrari.
I don't see much of a correlation between MEW and either real or nominal PCE.
Well, if you can't see it must not be there. BTW, what are you breathing? I suppose all that MEW just got buried in the backyard?
I think the concern with the demise of the ATM aka MEW is along the lines that over the last few years a substantial portion of GDP growth was attributed to this funding source.
The problem is that you can't take how much of MEW was spent on consumption and back that out of GDP and assume that's what GDP will be when MEW dries up.
MEW is an especially attractive source of credit, no doubt, but it is still credit, not income. The impact on GDP is going to be the difference between MEW as a source of credit compared to other sources of credit.
For example, many people bought cars with equity from their homes. Does that go away when MEW dries up? No, but it might mean that someone who wants to finance their car might have to pay a higher rate for an auto loan.
"The impact on GDP is going to be the difference between MEW as a source of credit compared to other sources of credit. For example, many people bought cars with equity from their homes. Does that go away when MEW dries up? No, but it might mean that someone who wants to finance their car might have to pay a higher rate for an auto loan." [Steve]
But a lot of the MEW loans were bad loans that never should have been made in the first place. Stop making bad loans and consumption will go down...
The oil industry is paying pretty good right now. Houston and the Gulf Coast are booming with activity in the oil and gas industry. I have heard of energy companies hiring 3 people per day.
Not a big D depression, but prolonged stagflation and a recession that might possibly be a double dipper seems the likely prospect to me. This blog has become obsessed with the RE meltdown and high finance hijinks and CDO fun and games in the past year or so, and there's been relatively little monitoring of the CA deficit and U.S. $ devaluation concerns, which were more focused on in earlier years, and which I think lie at the root cause of much of the mess, though the sharpies here all are aware of that matter and frequently allude to it. It's the link between RE and financial meltdowns and external balance that the rub, which deserves more explicit focus. Let's not forget the J-curve lag involved in readjusting the CA balance in our increasingly de-industrialized economy.
Id like to post a real life example of whats been going on with MEW.
I see a lot of charts and graphs but real life examples really illustrate the problem.
I have two family members who shall remain nameless that have done
their share of MEW spending.
Family member #1
House purchased in 2001 in NJ 115,000.
Mortgage amount financed is 80,000.
Current mortgage balance 2007 is 200,000.
Spent an extra 20,000 a year for the past 6 years.
Family member # 2
House purchased 2002 in NJ for 124,000.
Mortgage amount financed is 121,000.
Current mortgage balance 2007 is 245,000.
Spent an extra 24,487 a year for the last 5 years.
Now that these families have pretty much maxed out their house ATMs
there will be no more ridiculous spending. The other problem is
that now, they have to service this debt which means even less spending.
I cant possibly know the only two families that have been living large
on MEW. I think the national figures for MEW are low. I believe we are
at a point in this country where consumer spending is just going to
fall off a cliff.
In total, consumer credit rose by $12.2 billion to a record $2.469 trillion.
I have tried to use my keyboard to type out this total - it had taken me me three minutes 'cause I have never tried to write out a trillion w/ all the zeros. Have you?
As for the oil patch in Canada specifically Alberta it is grinding to a halt because of government royalty changes. A few billion dollars for exploration/refining (namely the oil sand projects) has already been shelved.Lots of programs are now beng reviewed. Gotta love it when governments change their mind, huh?
Wasn't there a long-run chart of home owners' equity as % of total home values posted here recently. In 1952, it stood at 80% and has been dropping fairly steadily since. But with the FF at 1%, mortgage rates dropped and everyone and their grandma refinanced, yet the equity ratio dropped further to less than 52%. No, American households did not use the opportunity to shore-up their finances.
Starting salaries at big city firms have gone up 60% or more in the last five years for law school graduates who are near the top of their classes.
Re: MEW
Has anybody figured out if the multiplier for MEW is different from the multiplier for wages or other spendable debt? I suspect it is. Big sums coming into the hands of people who are not accustomed to big sums can get dissipated pretty fast. Plus a big chunk of MEW goes to local "service professionals" who have been disintermediated out of so many other areas of the economy.
We need a more granular view of both income growth and consumer debt growth. Is income growth concentrated at the top? What is the distribution on the debt growth? Income inequality is at its largest gap so very likely the
income growth is skewed toward the wealthy. To summarily grasp the numbers without its current context in order to justify one's view is not conducive to a constructive discussion about the current economy.
This could be part of the credit card debt explosion.
2007-09-27 - Correspondent Home Equity Lending closure
Wells is done doing outside home equity business, effective September 28th, 2007. Here are the key parts of a notice forwarded to us from them on September 20th:
ATTENTION: Correspondent Clients Correspondent Home Equity Lending to be Discontinued
September 20, 2007
Wells Fargo regularly analyzes the market and makes changes that align with our prudent lending practices. We have determined that we cannot competitively offer home equity products through the correspondent channel with a level of profitability commensurate with the associated risks and our stringent portfolio return requirements given reduced liquidity in today's capital markets. Consequently, we have decided to discontinue offering our home equity products through the correspondent channel.
Wells Fargo Funding remains committed to serving your business needs by offering a variety of first mortgage products. Additionally, we are exploring other referral options to help minimize the impact of this change. Timing of the Change Effective on Friday, September 28, 2007 at 5 p.m. Central Time, we will no longer accept new home equity registrations through Wells Fargo Funding, our Correspondent channel. All loans must fund as committed by 5 p.m. CT on Friday, Nov. 30, 2007. We value our relationship with you and appreciate being the investor of choice for your first mortgage needs. Please contact a member of your regional sales team with any questions you may have.
No concrete word on the staff impact of this change as of yet.
This might require a paid subscription, so here's an excerpt:
"Despite potential tax and investment consequences, more individuals have been borrowing from their 401(k) plans or taking hardship withdrawals in recent months, some retirement-plan providers say.
Many in the field expect more 401(k) borrowing in 2008 as consumers struggle with tighter credit and potentially higher mortgage payments.
I don't think it's a groundswell, but it's enough to be noticed," says Rick Meigs, president of 401khelpcenter.com, which provides information on 401(k) plans."
You raise a good point about the ability of consumer credit to offset a decline in MEW, but remember that it is only home equity debt (junior liens) and cash out refis that matter; little, if any, of the part stemming from home sales is used for PCE.
little, if any, of the part stemming from home sales is used for PCE.
A lot of people with cash out some or all of their homes equity when they trade up. In most cases, people have used the equity to pay down credit cards or car loans to easy the budget shock of the new mortgage.
It would be interesting to determine how much creadit card increase is for:
1) Debit cards used as credit card
2) Credit cards used to get card membership points
3) Credit cards used to get a lower payment transfer from another card to pay off a higer interest rate card
4) Credit card with a 0% or low interest rate balance check that is invested in higher rate.
While I suspect that the increase was due to individual's credit card purchases, I would be interested in the Federal Reserve determines if the household's debt actually increased. Does anyone know?
3) The housing bust is, in itself, a big deal, and, in the larger context of the tapped out American "consumer", is the death knell of the American dollar
So who here is ready to start the credit card company implode-o-meter? As I understand the receivables are repackaged into a similiar array of instruments. I imagine foreign investors have a nice slug of our debt. They also have "Alt-A" and subprime credit cards.
My point is that those people who are in trouble are truly are in a big trouble. wawawa | Homepage | 10.05.07 - 4:05 pm | #
Are they? Chances are if they walk on their cc debt, even on their mortgage, this isn't cause for being fired. Ironically, the unintended consequence of the new bankruptcy law may be not that people become debt slaves for life, but that they simply choose to abandon their access to credit. It'll see how many choose this option once the banks try to compel them to accept their place at the bottom of the social heirarchy.
Fools..man do i love it when i get my paycheck...and its all mine...You ask a couple of buddies to meet you at the bar for a couple of cold ones after a good weeks work...and all they do is complain about Paycheck to paycheck...Maybe you should not have bought in 05 peek /down IO, and maybe you did not need that 06 Cadillac Escalade...dept free..and own.
Might be a little in your face ignorant yes...but when a person asks your advice and then does the total opposite of what you recommend..I feel zero pain for you...good day.
It ain't just J6P who is buried in debt. Good income isn't enough when you're overspending. A close relative and her husband just moved in with Mom so they can pay off debt which ended up in credit card balances. Both have masters degrees from prestigious schools--the husband is a well-employed techie and wife is a physical therapist. And they aren't kids with an excuse for naivete either--they're in their 50's. I stopped giving them advice 20 years ago when they started ignoring me.
Dominion Homes delivers 197 homes in Q3 vs 338 year ago
MEW -> credit cards -> payday loans -> auto title loans
It's a steep, slippery slope.
A higher cost of credit, but who cares? As long as the spigot's still flowin'.
This would be how they manage to be "surprisingly resilient to recent economic shocks" as mentioned in the previous thread. At some point soon, things are going to go all nonlinear.
So, consumer credit is growing at a rate lower than income growth. Where's this tapped out consumer I keep hearing about?
For another month the economy is driven not by wages but by debt. This makes a recession even more certain and who knows after that.
Another interesting chart - Personal Income (red) vs. Consumer Credit (blue). The consumer credit numbers are not in there yet, so it should be a little higher, but still well below income growth.
any guess on what would be the next ATM?
The great tension on this blog now is between two scenarios:
1) The housing bust is a tiny non-event in the midst of the great American economy, the greatest juggernaut in the history of the world.
2) The housing bust is, in itself, a big deal, and, in the larger context of the tapped out American "consumer", is the death knell of the American juggernaut.
Right now, with the indices penetrating new highs every day, scenario 1) is in charge.
Okay, CR and Tanta, this is YOUR blog. Tell us which it is:
1)
or
2)
Just aski
Is your income growth rate chart adjusted for inflation?
Neither is credit, REbear
Is your income growth rate chart adjusted for inflation?
Both consumer credit and income are in nominal terms.
Telegraph Blogs
The indices are irrelevant to the discussion. At this point, they're sheer speculation.
Major financial corporations are declaring major losses, and yet their stocks are going UP. Since when did lower earnings correspond to a higher value? Welcome to The New Economy Redux, where valuations and fundamentals no longer matter (again).
And the mortgage market was a market that saw incredible growth that defied all predictions of a bust. Until it stopped growing, and has since been falling apart in rather spectacular fashion. There's absolutely no indication that consumer credit is somehow magically different or will follow a different path.
When consumer credit starts to drop I'll start listening to the "U.S. Economy: Greatest Story Never Told" line, but as long as the savings rate is negative, we're in trouble.
So, consumer credit is growing at a rate lower than income growth. Where's this tapped out consumer I keep hearing about?
Steve, it just never occurs to you that those experiencing the income growth are not the same as those with the growing consumer credit balances.
Every time I talk to the CC company about anything... they try to push teaser-rate balance transfers on me.
I find, nowadays, that this blog must be read in conjunction with Accrued Interest.
Not because Accrued Interest is a genius, but rather because he is a bull outside the housing sector.
Or, at least, he was.
Now, he seems to be turning.
That, to me, is exceptionally frightening, because he's turning at exactly the moment when the consensus appears to be that all is well and that only nuts commenting on CR are in a bearish frame of mind.
Once again, comments?
put your fingers together
we are that close to a correction that will make August look like child's play.
I keep thinking back to that graph that superimposed Prozac consumption and the DJIA.
Same graph.
How many of you out there are taking modern anti-depressants?
It ain't zero.
arbogast, the ongoing and deepening housing bust is a BIG DEAL. But I don't think - and I've never thought - it was the "end of the American juggernaut". Slow growth or a mild recession were what I viewed as the two most likely scenarios - and that is what has happened.
In trying to pick between those two scenarios, I believe Steve is arguing for sluggish growth. I'm still leaning towards a mild recession. Not much between us as far as I can see.
The people that are way off are the Bear Stearns types (until recently) that saw booming growth, and the big "D" Depression advocates - at least so far.
Steve, I think credit card debt (as the title of the post implies) is increasing faster than wages. Credit card debt was up 8.1% in August (annualized) and 7.4% in July. Over that same period (end of June to End of August), wages were up 3.5% annualized. All nominal - and not even close.
Best to all.
"Steve, it just never occurs to you that those experiencing the income growth are not the same as those with the growing consumer credit balances." [tj and the bear]
Exactly! What type of labor is in high demand? It doesn't make any sense unless you factor in the Mozillo's of the world who have done very well in recent years...
"Steve is arguing for sluggish growth" [CR]
Best case scenario is that profit growth levels off.
"Steve, I think credit card debt (as the title of the post implies) is increasing faster than wages. Credit card debt was up 8.1% in August (annualized) and 7.4% in July. Over that same period (end of June to End of August), wages were up 3.5% annualized. All nominal - and not even close." [CR]
Thank you, CR. I knew that Steve's numbers didn't smell right, as least as far as consumers being able to afford higher credit card balances. Sometimes you have to use some common sense.
Where are all the good paying jobs????
CR,
Speaking as a big "D" depression guy, I haven't seen anything yet to suggest we're not still on track for one. The depression's scheduled for 2009, not tomorrow.
I believe there is a big dichotomy in the economy. Group of people (I think it is 33% of US households, like myself) who has paid off their mortgages and dont have any debt at all, because it is their style. And another 67% who are in debt up to their eyeballs and mostly are upside down on their mortgages.
My point is that those people who are in trouble are truly are in a big trouble. I believe once we are done with this housing/debt episode we are going to have bigger economical gap between haves and have nots.
tj & the bear,
GDP is reported on aggregate, right? Recessions happen when income, employment and sales decrease on aggregate, right?
wawa -
I believe that the votes of the 67% will outweigh the votes of the 33% and that the gap may be politically "adjusted".
FDIC Makes Public July 2007 Enforcement Actions; No Administrative Hearings Scheduled
FDIC: Press Releases - PR-85-2007 10/05/2007
With the price of natural gas, I'm going to get a wood stove this winter and heat my house with credit card offers.
Speaking of Mozillo, definitely check out the Countrywide memo posted on The Mess Greenspan Made (and some other places). It made my day.
Where's all this money going? Retail sales and service industries aren't growing that fast.
I'm wondering if households are rolling debt from one credit card to another or using them to pay household bills.
Of course, they may just be spending the money on lavish overseas vacations.
I received my most recent American Express Blue bill the other day and included in the bill was a notice of a change in terms. If you pay ONLY the minimum payment, they have the right to increase the minimum payment in each subsequent month. It doesn't mean anything to me as I never carry a balance, but this sounds like AMEX is preparing for an event in the near future in which they need to boost monthly revenue. I wonder if Visa or MC will follow suit.
Consumer debt is growing much faster than income.
Steve, I think credit card debt (as the title of the post implies) is increasing faster than wages. Credit card debt was up 8.1% in August (annualized) and 7.4% in July. Over that same period (end of June to End of August), wages were up 3.5% annualized. All nominal - and not even close.
In Q2 of 2006, revolving credit was up 8.9% annually
. The world didn't end. And why does only credit card debt matter? If we're trying to evaluate the health of the consumer (I assume that's what we're doing), shouldn't you look at total debt and ability to pay it back (income).
But here is some historical perspective on revolving credit.
Never underestimate the ability of Americans to buy things they don't need on credit and eat too much.
Steve,
If you include interest payments, debt increases at the rate of inflation (at least). Adjusting InterestOnDebt plus debt for inlation will give you back debt.
Therefore i feel debt should not be adjusted for inflation but on the other hand (income minus savings) should be adjusted for inflation. Savings part of the income should not be adjusted.
I'm just trying to understand .. thanks.
Steve, no matter how we cut it, consumer debt will not offset the decline in MEW. It isn't even close in total dollars. MEW was still very strong in Q2, and several research papers have suggested that MEW is spent over several quarters - so the big question is will the coming decline in MEW slow consumer spending?
The fact that people have started running up their credit card debt as MEW declines is interesting (and fun to watch since dryfly predicted it would happen) - but it really is small compared to MEW.
But if you want to look at total consumer debt, it is up 5.4% annualized over the two month period (end of June through August) - compared to wages up 3.5%. This is the period we are interest in because this is when we expect MEW to start declining rapidly (because of tighter lending standards).
Once again, this can offset a small portion of the decline in MEW - but only a small portion.
Best Wishes.
REBear,
You make payments with nominal dollars, but I should have used DPI instead of PI.
Above, anonymous has a good chart that shows total debt that looks pretty ominous, but if you look at a little longer time frame, it's not as scary.
If we're trying to evaluate the health of the consumer (I assume that's what we're doing), shouldn't you look at total debt and ability to pay it back (income).
CR has blogged about it here. They are close to all time highs, but seem to be improving in the last couple of months.
The problem with FOR ratios is they don't tell the micro story. The fact that household A has FOR of zero does little good for household B with a FOR of 50% when bills come due.
Let me tell you they're great but hardwood burns and gives off heat a lot longer
Kicker, that is a key problem with aggregate statistics. Some groups of U.S. households are already in deep trouble - just look at the record foreclosure activity. Other households are experiencing strong growth in income.
The key is to be in the 2nd group!
tj & the bear, a severe recession is possible - but it seems unlikely to me, at least in the near term (say through '08). That doesn't mean it can't happen, but I think sluggish growth or a mild recession are more likely. I just don't see the job losses happening that are necessary for a severe recession.
It is pretty easy to project the unemployment rate rising to 5.5% or 6% - but a severe recession means 8%, 9% or higher. I just don't see it.
Best Wishes.
J.C. Penney Co. opens 22 new stores. I grew up lower middle class but mom always found ways to shop at Penney's and this was BEFORE credit cards.
J.C. Penney Co. opens 22 new stores - Dallas Business Journal:
CR,
I agree that MEW will decrease. I just don't think it's as crucial to consumer spending as you do.
Honestly, looking at this chart and this chart, I'm a bit puzzled why you consider it so important. I don't see much of a correlation between MEW and either real or nominal PCE.
Two points:
--
"The true lender of last resort the credit card" -- David Rosenberg
Jas
Real DPI seems to have a much closer correlation to real PCE. There are a few spots where they diverge, but not for too long.
"In Q2 of 2006, revolving credit was up 8.9% annually. The world didn't end." [Steve]
No, because of the disastrous loans (tens or hundreds of billions?) that were made with housing as collateral. Right?
The world didn't end, but it should have. Now it's really gonna end (-;
lama - the price of natural gas??? It is CHEAP by any other measure. These current values are the reason why drilling numbers are beginning to slide. That being said, it is commodity that is in very short supply (long term) given the current and forecasted demand.
Given the low price of natural gas and the recent changes to certian royaly structures have caused a huge fall off on investment, in Alberta Canada.
So what - guess where a good % of US (secure) O&G supply is from...Alberta of course.
Steve, What are some good paying professions these days, where one would find incomes growing? Seriously...
Anyone? Where is the income growth for labor?
Barley, a joke with little data analysis. I assumed the prices were as last year. For the summer months, my bill is so low I wouldn't notice the unit cost.
You gave me good news. Thanks!
Fascinating equities market! There were 110K jobs added last month according to BLS, worth probably $300M/yr in income and wall st probably added $20T in share value on it today alone. Talk about leveraging. Amazing.
If yoy income + debt are 7% and 5% respectively (per Steve), then it would seem that most of the new debt is being used for investment (since yoy consumer expenditure is much less than 12%)
It's also possible that new debt is being used to make interest payments on old debt.
Once a household starts rolling payments from one credit card to another it's pretty much a given they are headed to bankruptcy.
I've had a few friends and co-workers who've gone down that path. In every cases, they were oblivious to it until a month before they found themselves in bankruptcy. The final collapse was usually triggered by a minor event that caused them to miss a credit card payment (car trouble, doctors bill, etc).
All at once, nobody was willing to extend them new credit and interest rates on their cards usually doubled (universal default). Other than bankruptcy or winning the lottery, there was no way out.
Funny thing is, even after the bankruptcy they never really grasped what happened. They'd always talk about it as if the emergency room visit or the "lemon" they were sold was the reason they were "forced" into bankruptcy. The fact that they were living beyond their means for almost a decade never enters their mind.
This time around, they are going to be in for even a bigger shock. The changes in bankruptcy laws aren't going to allow many of them to just shake off the debts like they did in the past.
Some day, people are going to say that the recession of 20XX was longers and more painful than it needed to be because of the bankruptcy law changes that were pushed through by the credit card companies.
Dan,
Financial Services is booming right now. In my little consulting firm, we could all work as many hours as there are in a week. Other CPA's tell me the same thing.
Aside from my own field, I can only look at the same published data you can.
Let's say income was growing at an absurdly incredible rate of 100% per year. And let's say that simultaneously consumer debt is growing at a (relatively) reasonable rate of 10% per year.
So does this comfortable cushion tell you anything about whether the consumer is tapped out? Wouldn't it be of some concern that his debt is growing at all!?? If he is consuming at a rate greater than his income is increasing, there's still cause for concern, isn't there?
I think it depends on how he is managing his income, and what he is using that debt to purchase.
Steve,
My last comment was directed at you, by the way...
Thanks lama! I'm glad for those in your profession, and that makes sense to me, as a lot of people do have savings and the tax laws and financial markets have become more complex...
That being said, it is commodity that is in very short supply (long term) given the current and forecasted demand.
I noticed that the natural gas powered Honda Civic GZ NGV
could be refueled for about $1.50 a gallon (gas equivalent). It's not going to take many years of high oil and gas prices before natural gas comes to parity with gasoline on a cost/calorie basis.
The last time I saw cost per calorie disparities like that was when I read about people heating their home with corn stoves because it was cheaper than heating with natural gas. Didn't take long for corn to catch up in cost/calorie.
Speaking of energy, it seems that the Saudis can't increase oil production like we thought they could. So maybe the peak oil people are on to something.
"The Economist" just dismissed the current high oil prices as OPEC being greedy, but you have to wonder if they (OPEC) have really become more disciplined or if they just don't have much spare capacity...
I know absolutely no one who has gotten a wage increase of 3.5%, who are these people? I must live in the wrong neighborhood, city and state.
I think the concern with the demise of the ATM aka MEW is along the lines that over the last few years a substantial portion of GDP growth was attributed to this funding source. In it's absence it is postulated that it will no longer be a significant contributor to GDP growth. Seems intuitively obvious to the most casual observers. No?
After credit card debt, we have PayDay loans, then pawn shops, then Tony Soprano. I figure that gives consumers 12-16 months before they have to actually start worrying about paying for all this.
Go long kneecap replacement prosthetics.
There may be something to Steve's income increases angle. It has nothing to do with income increases outstripping debt burden increases since the absolute debt increases in CC balances don't address the 20% rates lumped on top of all that increasing debt. That's a nuclear chain reaction eaiting to happen.
But, think about this at a micro level... If my income increases 5%, my increase is actually probably triple that if I decide to level it up on credit. So I can spend myself into BK even faster, if I were so inclined!
Right, Bobby. Some here (Steve) just post numbers & graphs. Others (me) just bloviate (-; We need to strike a balance, with common sense playing a role.
I just saw a video on Bloomberg. It was Econ professor Peter Morici from the University of Maryland talking about the employment data. He sees a contraction of high paying U.S. jobs.
Jobs in goods producing industries contracted by A LOT (emphasis in original (-: ). More jobs in the lower paying service sector. Lower construction employment is now spreading to non-residential area (commercial real estate). Government spending is up, but government spending on infrastructure is down.
He says that the odds of a recession are about 45%, and that it depends upon CRE. Consumer spending has been up this quarter, but not back up to levels of 2006 and 2007Q1.
So that kind of backs my theory that we keep slowing down and there is no end in sight. Yes, the bottom hasn't fallen out yet, but the outlook is for slower growth moving into recession and possibly depression...
Kicker,
Yep..The president makes a speach about ethanol and a few months later the price of tortillas goes up.
"Where's all this money going? Retail sales and service industries aren't growing that fast."
To pay for gas!
"I know absolutely no one who has gotten a wage increase of 3.5%, who are these people? I must live in the wrong neighborhood, city and state."
Government workers!
GDP is reported on aggregate, right? Recessions happen when income, employment and sales decrease on aggregate, right?
True, but irrelevant to my point. If you're standing in a room with Bill Gates the aggregate looks pretty good, but you're still no closer to buying a Ferrari.
I don't see much of a correlation between MEW and either real or nominal PCE.
Well, if you can't see it must not be there. BTW, what are you breathing? I suppose all that MEW just got buried in the backyard?
I think the concern with the demise of the ATM aka MEW is along the lines that over the last few years a substantial portion of GDP growth was attributed to this funding source.
The problem is that you can't take how much of MEW was spent on consumption and back that out of GDP and assume that's what GDP will be when MEW dries up.
MEW is an especially attractive source of credit, no doubt, but it is still credit, not income. The impact on GDP is going to be the difference between MEW as a source of credit compared to other sources of credit.
For example, many people bought cars with equity from their homes. Does that go away when MEW dries up? No, but it might mean that someone who wants to finance their car might have to pay a higher rate for an auto loan.
The slide continues, and no rate cut for awhile...
"The impact on GDP is going to be the difference between MEW as a source of credit compared to other sources of credit. For example, many people bought cars with equity from their homes. Does that go away when MEW dries up? No, but it might mean that someone who wants to finance their car might have to pay a higher rate for an auto loan." [Steve]
But a lot of the MEW loans were bad loans that never should have been made in the first place. Stop making bad loans and consumption will go down...
By the way, Steve, I do appreciate your perspective. You always do back up your opinions with good statistics...
Detroit Dan:
The oil industry is paying pretty good right now. Houston and the Gulf Coast are booming with activity in the oil and gas industry. I have heard of energy companies hiring 3 people per day.
I hope that helps.
If it is true that home ATM is closed, and credit card debt growing faster than PI... for how long can this trend run?
Not a big D depression, but prolonged stagflation and a recession that might possibly be a double dipper seems the likely prospect to me. This blog has become obsessed with the RE meltdown and high finance hijinks and CDO fun and games in the past year or so, and there's been relatively little monitoring of the CA deficit and U.S. $ devaluation concerns, which were more focused on in earlier years, and which I think lie at the root cause of much of the mess, though the sharpies here all are aware of that matter and frequently allude to it. It's the link between RE and financial meltdowns and external balance that the rub, which deserves more explicit focus. Let's not forget the J-curve lag involved in readjusting the CA balance in our increasingly de-industrialized economy.
Id like to post a real life example of whats been going on with MEW.
I see a lot of charts and graphs but real life examples really illustrate the problem.
I have two family members who shall remain nameless that have done
their share of MEW spending.
Family member #1
House purchased in 2001 in NJ 115,000.
Mortgage amount financed is 80,000.
Current mortgage balance 2007 is 200,000.
Spent an extra 20,000 a year for the past 6 years.
Family member # 2
House purchased 2002 in NJ for 124,000.
Mortgage amount financed is 121,000.
Current mortgage balance 2007 is 245,000.
Spent an extra 24,487 a year for the last 5 years.
Now that these families have pretty much maxed out their house ATMs
there will be no more ridiculous spending. The other problem is
that now, they have to service this debt which means even less spending.
I cant possibly know the only two families that have been living large
on MEW. I think the national figures for MEW are low. I believe we are
at a point in this country where consumer spending is just going to
fall off a cliff.
Sources of credit? How about quantity of credit??
MEW enabled J6P to access and spend dollars far in excess of that available (and serviceable) on credit cards.
Someone who normally couldn't afford a used BMW is now sporting an AMG MB; of course, it's financed for 30 years.
OkieLawyer
I also heard that 3 major refinery projects will be kicked off soon too. Estimated at 10k jobs each and last for years........
In total, consumer credit rose by $12.2 billion to a record $2.469 trillion.
I have tried to use my keyboard to type out this total - it had taken me me three minutes 'cause I have never tried to write out a trillion w/ all the zeros. Have you?
As for the oil patch in Canada specifically Alberta it is grinding to a halt because of government royalty changes. A few billion dollars for exploration/refining (namely the oil sand projects) has already been shelved.Lots of programs are now beng reviewed. Gotta love it when governments change their mind, huh?
Wasn't there a long-run chart of home owners' equity as % of total home values posted here recently. In 1952, it stood at 80% and has been dropping fairly steadily since. But with the FF at 1%, mortgage rates dropped and everyone and their grandma refinanced, yet the equity ratio dropped further to less than 52%. No, American households did not use the opportunity to shore-up their finances.
I know absolutely no one who has gotten a wage increase of 3.5%,
Income growth has a component due to population growth -- if the population grows 1%, income will grow 1% even if no one gets a raise.
Re: Jobs
Starting salaries at big city firms have gone up 60% or more in the last five years for law school graduates who are near the top of their classes.
Re: MEW
Has anybody figured out if the multiplier for MEW is different from the multiplier for wages or other spendable debt? I suspect it is. Big sums coming into the hands of people who are not accustomed to big sums can get dissipated pretty fast. Plus a big chunk of MEW goes to local "service professionals" who have been disintermediated out of so many other areas of the economy.
We need a more granular view of both income growth and consumer debt growth. Is income growth concentrated at the top? What is the distribution on the debt growth? Income inequality is at its largest gap so very likely the
income growth is skewed toward the wealthy. To summarily grasp the numbers without its current context in order to justify one's view is not conducive to a constructive discussion about the current economy.
ChicagoDude:
I received the same notice from American Express. But the notice did not say how much increase would be or what formula they will be using.
It is interesting to see if this is going to be a new trend in CC industry.
This could be part of the credit card debt explosion.
2007-09-27 - Correspondent Home Equity Lending closure
Wells is done doing outside home equity business, effective September 28th, 2007. Here are the key parts of a notice forwarded to us from them on September 20th:
ATTENTION: Correspondent Clients Correspondent Home Equity Lending to be Discontinued
September 20, 2007
Wells Fargo regularly analyzes the market and makes changes that align with our prudent lending practices. We have determined that we cannot competitively offer home equity products through the correspondent channel with a level of profitability commensurate with the associated risks and our stringent portfolio return requirements given reduced liquidity in today's capital markets. Consequently, we have decided to discontinue offering our home equity products through the correspondent channel.
Wells Fargo Funding remains committed to serving your business needs by offering a variety of first mortgage products. Additionally, we are exploring other referral options to help minimize the impact of this change. Timing of the Change Effective on Friday, September 28, 2007 at 5 p.m. Central Time, we will no longer accept new home equity registrations through Wells Fargo Funding, our Correspondent channel. All loans must fund as committed by 5 p.m. CT on Friday, Nov. 30, 2007. We value our relationship with you and appreciate being the investor of choice for your first mortgage needs. Please contact a member of your regional sales team with any questions you may have.
No concrete word on the staff impact of this change as of yet.
I know absolutely no one who has gotten a wage increase of 3.5%,
Senate votes for 3.1 percent pay raise in 2006 (10/21/05) -- GovExec.com
The January 1, 2006 military pay raise for all grades is 3.1%.
and there voting for 3.5% for 08
An article from the WSJ that is on-topic:
401(k) Loans: At Your Own Risk - WSJ.com
This might require a paid subscription, so here's an excerpt:
"Despite potential tax and investment consequences, more individuals have been borrowing from their 401(k) plans or taking hardship withdrawals in recent months, some retirement-plan providers say.
Many in the field expect more 401(k) borrowing in 2008 as consumers struggle with tighter credit and potentially higher mortgage payments.
I don't think it's a groundswell, but it's enough to be noticed," says Rick Meigs, president of 401khelpcenter.com, which provides information on 401(k) plans."
MEW enabled J6P to access and spend dollars far in excess of that available (and serviceable) on credit cards.
Someone who normally couldn't afford a used BMW is now sporting an AMG MB; of course, it's financed for 30 years.
tj & the bear |
That's the issue, leverage. This effects all the players from Citi-bear sterns, hedge funds to the homeowner going into foreclosure.
Short,
Thanks for the excerpts - that is a real tell IMNSHO - though subject to interpretation.
Depression? With a president worse than Hoover in the White House?
What do you think?
CR:
You raise a good point about the ability of consumer credit to offset a decline in MEW, but remember that it is only home equity debt (junior liens) and cash out refis that matter; little, if any, of the part stemming from home sales is used for PCE.
little, if any, of the part stemming from home sales is used for PCE.
A lot of people with cash out some or all of their homes equity when they trade up. In most cases, people have used the equity to pay down credit cards or car loans to easy the budget shock of the new mortgage.
So, indirectly it feeds back into PCE.
It would be interesting to determine how much creadit card increase is for:
1) Debit cards used as credit card
2) Credit cards used to get card membership points
3) Credit cards used to get a lower payment transfer from another card to pay off a higer interest rate card
4) Credit card with a 0% or low interest rate balance check that is invested in higher rate.
While I suspect that the increase was due to individual's credit card purchases, I would be interested in the Federal Reserve determines if the household's debt actually increased. Does anyone know?
$12 Billion a month seems very insignificant when GDP is 1 Trillion a month.
arbogast...add this...
3) The housing bust is, in itself, a big deal, and, in the larger context of the tapped out American "consumer", is the death knell of the American dollar
Just sayi
So who here is ready to start the credit card company implode-o-meter? As I understand the receivables are repackaged into a similiar array of instruments. I imagine foreign investors have a nice slug of our debt. They also have "Alt-A" and subprime credit cards.
My point is that those people who are in trouble are truly are in a big trouble. wawawa | Homepage | 10.05.07 - 4:05 pm | #
Are they? Chances are if they walk on their cc debt, even on their mortgage, this isn't cause for being fired. Ironically, the unintended consequence of the new bankruptcy law may be not that people become debt slaves for life, but that they simply choose to abandon their access to credit. It'll see how many choose this option once the banks try to compel them to accept their place at the bottom of the social heirarchy.
It won't happen.
Fools..man do i love it when i get my paycheck...and its all mine...You ask a couple of buddies to meet you at the bar for a couple of cold ones after a good weeks work...and all they do is complain about Paycheck to paycheck...Maybe you should not have bought in 05 peek /down IO, and maybe you did not need that 06 Cadillac Escalade...dept free..and own.
Might be a little in your face ignorant yes...but when a person asks your advice and then does the total opposite of what you recommend..I feel zero pain for you...good day.
Excuse I meant to say I was debt free and Own..Captain Morgan kicking in...cheers
It ain't just J6P who is buried in debt. Good income isn't enough when you're overspending. A close relative and her husband just moved in with Mom so they can pay off debt which ended up in credit card balances. Both have masters degrees from prestigious schools--the husband is a well-employed techie and wife is a physical therapist. And they aren't kids with an excuse for naivete either--they're in their 50's. I stopped giving them advice 20 years ago when they started ignoring me.