Meet the Author

Bruce Champ |

Senior Research Economist

Bruce Champ

Bruce Champ was a senior research economist in the Research Department of the Federal Reserve Bank of Cleveland.

Read full bio


Economic Trends

Household Financial Conditions

by Bruce Champ and Bethany Tinlin

Since mid-2005, the personal saving rate has been negative, implying levels of aggregate consumer spending that outstrip disposable income. The personal saving rate stood at –1.0 percent in the first quarter of 2007. Despite such low personal saving rates, the wealth-to-income ratio has trended upward since early 2003. Although gains from rising house prices slowed in 2006, rising equity prices contributed strongly to increases in household wealth.

Growth in home mortgage debt moderated in the fourth quarter of 2006, after having grown at double-digit rates since late 2001. Total consumer credit growth rose in the first quarter of 2007, fueled mainly by an increase in revolving credit. Most of this increase was attributed to strong retail sales (other than for autos) and rising gasoline prices. Purchases of these kinds often are made with credit cards.

Despite the high levels of consumer debt, delinquency rates on most forms of consumer debt remain low. However, relatively high delinquency rates in the subprime mortgage market have received much attention recently. More than half of the foreclosures reported in the fourth quarter of 2006 were associated with subprime mortgages. The subprime market consists of mortgage loans made to borrowers viewed as having high credit risk, due to little credit history or higher default probabilities. Most dramatic was the increase in delinquency rates for subprime mortgages with adjustable rates (ARMs) in 2006. Problems are likely more acute for subprime ARMs partly because decelerating house prices have made it difficult for subprime borrowers to refinance in advance of rising interest rates.

On May 17, Federal Reserve chairman Ben Bernanke delivered a speech on the subprime mortgage market at a conference at the Chicago Fed. He noted that there have already been “signs of self-correction in the market” and that, as of yet, there has been “no serious broader spillover to banks or thrift institutions.” Bernanke also stated that although “we are likely to see further increases in delinquencies and foreclosures this year and next…we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

After reaching its highest level since 9/11 in February, the Conference Board’s Index of Consumer Confidence fell in March and April. The present situation component of the index played an important role in the decline, although the expectations component also suffered a modest decrease. Contributing to the decline was a deterioration in household perceptions of current job conditions and rising energy prices.

The University of Michigan Consumer Sentiment Index also declined moderately in April, reaching its lowest level since last September. The expectations component of the index fell, countered by a small increase in the current conditions component. Despite the overall decline in the index during April, it witnessed a rebound in the last two weeks of the month, as gasoline prices leveled off and equity prices rose. The index’s preliminary May release also indicates a modest improvement.