U.S. household debt drops for first time in 50 years

In the midst of some of the worst economic conditions in decades, national consumer debt levels declined for the first time in half a century.

The Federal Reserve's third-quarter analysis of consumer and business spending, released Dec. 10, found that U.S. consumer household debt dropped 0.8 percent, or $117.4 billion, to $13.9 trillion in the third quarter on an annually adjusted basis.

The leading factor in the drop - the first since the Fed began tracking consumer spending habits more than 50 years ago - was home mortgage debt, which fell by an annual rate of 2.4 percent in the quarter. That continues a two-year trend of declining growth rates in home mortgages.

Drury University economics professor Bill Rohlf Jr. said he is surprised that the overall household debt figure actually decreased, even though slower growth in consumer debt often accompanies slower growth in the overall economy.

"You've got people who are panicking, (they) realize that there's a recession coming, and they're trying to get a handle on their financial situation," he said. "Rather than expanding their debt position, they're trying to retrench and pull back so they're better able to handle themselves if the recession is an extended one."

A larger scale

Mortgage volume led the decline in overall consumer debt. U.S. existing-home sales fell 8.6 percent in November from the October levels and were down 10.6 percent compared to November 2007, according to the National Association of Realtors.

"The quickly deteriorating conditions in the job market, stock market and consumer confidence in October and November have knocked down home sales to another level," NAR Chief Economist Lawrence Yun said in a news release. "It is, therefore, imperative to provide incentives for homebuyers to get back into the market."

But the impact of the crisis reaches beyond homeownership. Rohlf points to statistics from the National Association of Auto Dealers, which found that 900 new-vehicle dealers closed in 2008, representing about 4.5 percent of the national total. The association expects another 1,100 dealers to close in 2009.

Tony Stubblefield, managing partner of Reliable Toyota, Lexus, BMW, Scion Superstore in Springfield, said he's seen a definite drop in consumer interest in taking on new debt for vehicles, though he declined to disclose specifics.

"We are seeing a lack of business not because of a lack of funding or money to loan, but just because of a lack of consumer confidence," Stubblefield said. "January is going to be tough as people wait and see with the new legislators coming in, and February is always a tough month historically."

To Missouri State University economics professor James Philpot, the decrease in household debt is fallout from Americans' living beyond their means for 20 years.

"This really is the first real recession a lot of consumers have even seen - in 1991 and then in 2000 and 2001, those were really just blips compared to what people are talking about now," Philpot said. "We've had this very consumer-driven economy, and the first time a lot of these consumers are seeing a recession it may have really brought home some reality that we haven't seen in previous downturns."

Perception vs. reality

The reality, according to Rohlf, is that the current recession is affecting many more people than in previous economic cycles.

"My sense is that people recognize that there's something about this downturn that's different, and that's why we're seeing this downturn in debt," he said. "Every day when you pick up the newspaper, you see some other dimension of this downturn. The average consumer is seeing the same stuff and realizes this may be different than some of the downturns they have lived through."

Philpot said, however, that it's unclear whether consumer perception of the market portrays what's really happening in the market - or what causes it.

"There can be a disconnect between the data - which aren't perfect either - and reality," Philpot said. "But we like to think people deal with their finances based on their expectations, and if most people are thinking that they need to be careful, then maybe there's something to be seen there."

Stubblefield, meanwhile, is trying to remind consumers that even in a recession, most people are relatively unaffected.

He pointed to his $80 million customer loan portfolio with Toyota Financial Services, the financing arm of Toyota. "Our loan portfolio had a loss rate of about 0.4 percent, and now it's 0.8 percent," he said. "While it's doubled, it's still less than 1 percent of the portfolio. I don't think people realize that when they talk about these numbers."