Wednesday, February 9, 2011

Households Borrow More: A Good Beginning

The Lehmann Letter (SM)

Residential real estate was ground zero for the recent recession. When the housing bubble burst, everything else imploded with it.

But the implosion affected more than housing. It also hobbled household balance sheets: Liquid assets were down, home values plunged, debt was up and net worth fell. These reversals motivated households to limit borrowing and buying order to conserve cash and repay debt. That inhibited household spending which, in turn, delayed economic recovery and expansion.

That's why this letter has focused on consumer credit. Although consumer credit excludes mortgages, consumer credit is an important measure of household borrowing. As you can see in the chart, consumer credit turned negative during the recession as households desperately tried to repay their debts in order to resuscitate their balance sheets.

Consumer Credit

Recessions shaded

Lately there have been small increases in consumer borrowing. This week's report from the Federal Reserve is most encouraging:

Consumer credit grew by $73.2 billion in December: Its best gain in a long time. If this encouraging trend has legs, we can be optimistic that households are borrowing and spending again.

(The chart was taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

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