Americans have shed their indebtedness by $1.4 trillion since the height of the financial crisis in the fall of 2008 through the third quarter of 2012, according to a new report from the Federal Reserve Bank of New York.
The new data analysis reveals that U.S. households actively reduced their debt obligations during this period and reduced new borrowing.
“These household choices, along with banks’ stricter lending standards, helped drive this deleveraging process,” the N.Y. Fed’s report said.
During that four-year period, the deleveraging resulted in a decrease from $12.7 trillion in total debt at its peak in the third-quarter 2008 to $11.3 trillion at the end of third-quarter 2012.
Total household debt has decreased roughly 11 percent since its peak, reads “The Financial Crisis at the Kitchen Table: Trends in Household Debt and Credit,” by Meta Brown, Andrew Haughwout, Donghoon Lee, and Wilbert van der Klaauw.
Mortgage-related debt now accounts for 76 percent of total debt, with the remainder composed of credit cards, auto loans, student loans, and other consumer debt.
Much of this leveraging, of course, was not voluntary as the unprecedented foreclosure crisis has shown. However, bankruptcies and foreclosures have declined substantially between the second-quarter 2010 and the third-quarter 2012.
“Holding aside defaults, from 2007 through 2011, consumers reduced their debt at a pace not seen over the last ten years,” the N.Y. Fed’s report states. “A remaining issue is whether this reduced reliance on debt is a result of borrowers being forced to pay down debt as credit standards tightened, or a more voluntary change in saving behavior.”
Much of the deleveraging was voluntary, the study concludes. It found that the following three “mechanisms” were at work:
- Declining consumer use of, and demand for, credit;
- Declining lender supply of credit; and
- An increasing amount of nonperforming debt written off by lenders as a result of the sudden increase in default rates.
In light of recent mostly modest improvements in credit availability, the question posed by the study is: How much further consumers’ voluntary actions will lower aggregate debt before they begin to spend again?
This question is important in the context of the U.S. economic outlook.
“While household debt pay-down has helped improve household balance sheets, it has also likely contributed to slow consumption growth since the beginning of the recession,” the study said.
The future “trajectory for consumer indebtedness” has important implications for consumption and economic growth going forward, the study found.