Housing is helping…

Housing a Bright Spot in Fed’s Latest Household Debt and Credit Report

Jann Swanson | Mortgage News Daily | Feb 28 2013 | link

James McAndrews, Executive Vice President and Director of Research at the Federal Reserve Bank of New York told a Household Debt and Credit Press Briefing on Thursday that three and a half years after the end of the “Great Recession” expansion remains sluggish with both economic and job growth growing more slowly than in earlier business cycles and inflation remaining subdued.

These conditions were the basis for the Federal Open Market Committee’s (FOMC) January decision to continue to pursue its “highly accommodative” policy stance combining an exceptionally low policy interest rate with forward guidance indicating that this range would remain at least until unemployment falls below 6½ percent, inflation is projected to be no more than 2½ percent between one and two years in the future, and inflation expectations remain well anchored.  The FOMC will also continue to purchasing securities until it sees substantial improvement in the outlook for the labor market.  Combined, these actions are intended to ease financial conditions and thereby help to establish a self-sustaining economic expansion.

Recent data on the U.S. economy have been mixed with GDP declining slightly in the 4th quarter of 2012 and payment employment up by 157,000, well below the 200,000 monthly gains in the fourth quarter.  The unemployment rate edged up to 7.9 percent.  Beneath the surface however there are indications that private demand firmed at the end of 2012 and is holding thus far this year.  Consumer spending, especially for durable goods has strengthened, reflecting some improvements in labor market conditions, consumer confidence, household balance sheets and access to credit.

McAndrews said another major plus is the housing market with housing starts, home sales and home pricing all trending up.  In 2009 residential investment was a 0.4 percentage point drag on GDP growth; in 2013 it is likely to provide a boost to growth on the order of 0.5 percentage point.  Also up are business investment in equipment and software and orders for nondefense capital goods.  Survey-based indicators of manufacturing activity also have begun to improve in several other major economies around the world.

“Of course the quickening pace of auto, home, and capital goods sales and orders, all interest-sensitive goods, is consistent with the highly accommodative stance of monetary policy, which not only lowers interest rates but enhances credit availability as well.” McAndrews said.

Along with these positive economic developments, there has been a notable increase in risk appetite among financial market participants over recent months, although there was some pull-back and volatility this week following the election results in Italy.  From their recent lows in mid-November, equity prices in the United States are up around 10 percent.  Credit spreads also have narrowed.

McAndrews said several factors advise caution.  First, for the last three years enthusiasm in the new year has turned to gloom by midyear.  Second, households are still adjusting to January 1 tax adjustments which reduced disposable income for many.  Third, while the full fiscal cliff was avoided in early January, there are many policy issues remaining, including the sequester.  If the latter does happen and remains in effect for the full year it could reduce projected real GDP growth for 2013 by about ½ percentage point on top of the ¾ to 1 percentage point drag from already-implemented fiscal policy actions.

On the topic of household debt and credit, McAndrews said that researchers at the New York Fed have put considerable effort into improving public understanding of consumer debt and credit conditions.  As McAndrews put it, “Consumer debts occupy the intersection of Main and Wall Streets, and are thus of great interest to the public.”  He added that, by most accounts the financial crisis grew out of the mortgage market, the largest and most important form of consumer debt.

The Fed’s quarterly report has documented the enormous rise in consumer delinquencies and defaults as the housing bust and the Great Recession unfolded, and, over the last several years has provided an in-depth look at the largest reduction in household debt the Fed has ever recorded.  Since it peaked in the third quarter of 2008 household debt has fallen by $1.3 trillion-about 10 percent-mostly because of declining mortgage balances.

The fourth quarter of 2012 report was released on Thursday and shows some clear signs of healing in consumer debt markets.  First, and perhaps most interesting, the data indicate that the recent improvement in the housing market was accompanied by a slight increase in the level of household debt.  It is too soon to conclude that this means households are beginning to increase their debts again but there are signs that the four-year long contraction is slowing.  Consumer delinquency rates continue to recover as well and overall delinquency rates are now back to pre-recession levels – around 8½ percent – but not to the 3-5 percent rates that prevailed in the first half of the 2000s.

McAndrews said only one form of consumer borrowing-student loans-has grown consistently during the long period of retrenchment and educational debt is now the second largest form of consumer debt, after mortgages. Student loans are widely held-roughly 39 million people have them including a third of people in their 20s and 30s.

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