Like Most Food Diets, the U.S. Consumer Debt Diet is Failing Too

U.S. consumers are on the march, again, of consuming debt.  It is not that the deleveraging of U.S. consumers has ended because the household debt service ratio is still decreasing, but that the appetite for credit is increasing.  And the demand for credit does not necessarily indicate a positive for the U.S. economy, especially when U.S. consumers are in a less advantageous position.  The top two occupations in the U.S. for 2010 were - Retail Salespersons and Cashiers.  These two occupations employed 4.2 million (Retail Salespersons) and 3.4 million (Cashiers).  The hourly mean wage for Retail Salespersons is under $15.00 with Cashiers under $10.00.  Cashiers are not alone in earning a low wage because the hourly mean wage for eight of the top ten occupations are under $10.00, including Cashiers.

The resumption of debt consumption by U.S. consumers was inevitable, however the rate is at a minimum concerning.  Overall, U.S. consumer credit increased by an annualized rate of 9.9% for November 2011.  If the 9.9% holds, it would be the largest percentage change of the reporting period 2006 - 2011.  The largess of the 9.9% is inline with a revolving credit increase of 8.5% and a non revolving increase of 10.75%.  The statistics do not include loans secured by real estate.  The most common type of revolving credit is credit cards whereas non revolving credit includes the likes of education and automobile loans that have fixed payments.  Even though, the Federal Reserve did not include loans secured by real estate, home equity lines of credit (HELOC) provide important insight into asset leveraging by homeowners.  A HELOC is revolving credit.

The opening of a HELOC is less interesting than the actual use of the HELOC.  Opening a line of credit backed by the equity in real property indicates preparation or planning, but the HELOC may never be used.  The use of a HELOC generally indicates a downward trend in personal finances, especially during the current economic conditions thus the HELOC becomes a sort of bridge loan until conditions improve.  Using a HELOC to remove the equity from real property during uncertain times to just pad a savings account seems unlikely because the HELOC is tied to the property and becomes a debt obligation of the homeowner unless, of course, it is a non-recourse loan.  The Federal Reserve Bank of New York reported an increase in HELOC balances of $14 billion or 2.3% for the third quarter in 2011.  More interesting, is the upward trend since the first quarter of 2009 for HELOC balances versus HELOC credit limits.

Job creation in the U.S. is underpinned by low wage jobs, the majority (8 of 10 top occupations) of which earn under $10.00 an hour.  Consumer credit is increasing at its highest level during the report's timeframe of 2006 - 2011.  Homeowners are increasing their use of HELOCs as balances are greater than the available credit since the first quarter of 2009.  If the U.S. consumer was a corporation, it would have a decreasing or static revenue stream with decaying assets and a greater reliance on short term debt in order to keep the day to day operations running.  The corporation could sell off assets to raise capital, but that is dependent upon demand because a lack of demand could lead to a fire sale.  The corporation could max out borrowing to invest in research and development to increase market share or enter into a new line of business.  A difficult and costly move with the current capital market.  So bankruptcy.
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Sources:
The Federal Reserve Board, What You Should Know About Home Equity Lines of Credit, April 6, 2011. Available at: http://www.federalreserve.gov/pubs/equity/equity_english.htm last visited January 20, 2012.

The Federal Reserve Board, Household Debt Service and Financial Obligations Ratios, December 13, 2011. Available at: http://www.federalreserve.gov/releases/housedebt/ last visited January 20, 2012.

Board of Governors of the Federal Reserve System, Consumer Credit G.19, November 2011. Available at: http://www.federalreserve.gov/releases/g19/Current/#fn3a last visited January 20, 2012.

Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit, November 2011. Available at: http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q32011.pdf last visited January 20, 2012.

U.S. Department of Labor, Bureau of Labor Statistics, Occupational Employment and Wages - May 2010, May 17, 2011.