U.S. Debt Growth Slows As Households Deleverage

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Today at noon the Federal Reserve released its Flow of Funds Account report.  In the third quarter, U.S. debt growth grew at its slowest pace on record.  Overall debt grew by 2.8%.  That number is comprised of household borrowing, business borrowing, state and federal government borrowing, and financial sector borrowing.

Household debt, which represents nearly 40% of all U.S. debt, fell by 2.6% in the third quarter.  Mortgage debt declined by 3.6% while consumer credit declined by 3.2%.  While the financial crisis may have taught some prudence to the American consumer, the decline in household mortgage is more of a function of the supply of credit than the demand for it.  While mortgage rates are being kept low by Fed activity, banks are reluctant to lend.  Meanwhile, consumers are loath to make a home purchase due to the perceived risk in the housing market.  Likewise, consumer credit is on the decline as the result of tightening on the part of credit card issuers.  Credit card issuers have raised interest rates in recent month both in response to the Credit Card Act as well as rising default rates.  While the overall reduction in household debt is probably a good thing for the long-term health of the economy, its hard to see sustained recovery in the near term in the absence of strong consumer demand.

Some good news coming out of the Fed’s report was an uptick in municipal borrowing. During the height of the financial crisis investors’ flight to cash and treasuries put state and local borrowing into a period of unprecedented decline.  That trend seems to have reverse, with state and local government borrowing increasing by 5.1% in the third quarter of 2009.  The liabilities of the federal government grew by 20.6% in the third quarter.  While a massive figure in any other post-war time period, its well below the 39.2% Federal debt growth in the third quarter of 2008.

Garrett W. McIntyre