Meet the Author

O. Emre Ergungor |

Assistant Vice President and Economist

O. Emre Ergungor

Emre Ergungor is an assistant vice president and economist in the Research Department at the Federal Reserve Bank of Cleveland. He is responsible for the household finance section of the Banking Policy and Analysis Group, which conducts research on regulatory policy and banking issues and provides advice on financial policy formulation. He also oversees the Federal Reserve System’s Muni Financial Monitoring Team (FMT), which monitors municipal bond markets, state and local funding, and public pension funds. Dr. Ergungor specializes in research related to financial intermediation, information economics, housing policy, and credit access in low- to moderate-income households.

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Meet the Author

Patricia Waiwood |

Research Analyst

Patricia Waiwood

Patricia Waiwood is a research analyst in the Research Department of the Federal Reserve Bank of Cleveland. She joined the Bank in October 2011, and her work focuses on macroeconomics, financial economics, and banking.

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Economic Trends

Consumer Finances and a Sustainable Recovery

O. Emre Ergungor and Patricia Waiwood

Three rounds of quantitative easing since the official end of the recession 39 months ago testify to the fact that the economy is languishing. To evaluate the possibility of a sustainable recovery in the near future, we take a closer look at consumer finances, since consumption accounts for roughly 70 percent of gross domestic product.

In thinking about consumer finances, the primary resource available for new consumption is disposable personal income. The recession and financial crisis in 2008 pushed both disposable income and consumption growth negative for the first time in over 20 years. However, both have reemerged in positive territory and are slowly gaining momentum. Since turning positive in April, personal income has logged growth rates of less than 1 percent in every month save for July, when it cleared 1 percent by 0.3 percentage points.

The corresponding growth figures for households’ net worth have been positive since the end of 2009 and have averaged 5 percent since then. One reason for the increase is a lack of new borrowing: As a percentage of disposable income, new borrowing is still negative, meaning that on a net, aggregated basis loans are either being paid off (and not renewed) or are defaulting, or a combination of the two. Another reason, which originates on the other side of households’ balance sheet, is that the value of real-estate holdings is increasing:  It jumped about $400 billion, or 2.1 percent, to $19.1 trillion, in the second quarter, which is its highest level since the last quarter of 2008.

Over the same period, growth in consumption stayed steady at approximately 2 percent, which is slightly below last year’s average monthly growth rate of 2.5 percent and also below where it was 12 months ago. The personal savings rate, at 4.2 percent in July 2012, shows that households are saving more than they have been over the past 12 months. For additional evidence on the trajectory and strength of consumer spending, look to retail sales. According to the Census Bureau, sales excluding autos and gas rose only 0.1 percent in August, as many retailers saw sales decline. Looking into the near future, real consumer spending can be expected to average about 1.8 percent from the fourth quarter of 2012 to the first quarter of 2013, according to the University of Michigan’s Survey of Consumers.

Total outstanding household debt is down nearly $1.3 trillion since its peak in the third quarter of 2008, according to the Household Debt and Credit Report of the New York Fed. As debt levels shrink, consumers are spending less of their disposable income on repayments related to mortgages and consumer loans. The household debt service ratio, which measures repayments as a share of income, has been on a downward path since the third quarter of 2008. Much of the drop is likely to be coming from historically low interest rates, which lower debt service requirements on new debt, refinanced debt, or debt that carries floating interest rates. The sharp decline since 2008 indicates that the debt-service burden has fallen substantially, which may make borrowers more inclined to borrow again and financial institutions more willing to lend.

Then again, consumer lending may not be seeing robust growth. According to the latest Senior Loan Officer Survey, banks are showing a bit more enthusiasm to lend now than they showed at the end of the recession. In fact, banks were more enthusiastic about making consumer loans just one year after the end of the recession than they are now. On the demand side of the equation, banks are reporting weakening demand for all types of consumer loans, yet the net percentage of domestic banks reporting stronger demand is still positive, as it has been since the beginning of last year.

Another way to gauge the health of consumers’ finances is to ask consumers themselves for their opinions on their financial condition both now and in the near future. The University of Michigan does this every month. In September 2012, both measures posted gains. The gains in personal finances were based on reduced debt balances and increased asset values. Thirty-seven percent of all consumers reported that their financial situation is worsening, down from 40 percent in August and 49 percent a year ago. When asked about their financial prospects for the next year, 61 percent of families predict that their financial situation will remain unchanged, and the majority expected no increase in their nominal incomes during the year ahead.

What do these data samples bode for a recovery of consumption, the primary driver of the U.S. economy? The data shown here suggest that consumers’ financial condition is improving, which may sharpen their appetite for spending, all else equal. Yet consumers seem to be cautious, saving a greater share of their incomes and refraining from new borrowing. This situation, perhaps caused by economic uncertainty and the prospect of facing hefty tax hikes in the not-too-distant future, may be slowing consumer spending and the recovery.