Portrait of the American Consumer

In this post we take a look at the American consumer. The Consumer Metrics Institute states that the American consumer is currently responsible for 71% of GDP revealing the importance of understanding the consumer’s ability and propensity to spend. Leaving the employment market for another post, we examine the consumer’s income, savings, and debt profiles. We finish with a summary of the consumer’s health and its economic implications. We consider the American consumer to be a good proxy for the Canadian consumer in many respects.

All graphs used in this essay are courtesy of FRED® unless otherwise noted. Click on any graph to open it in another window to enlarge it.


The key datum for the consumer is his disposable income. This is roughly the sum of all forms of income less all forms of taxation and social security premiums. Adjusted for inflation and expressed on a per capita basis, this appears as (a scaling factor has been applied to make the vertical scale more readable as thousands of dollars):

Figure 1.

It appears that disposable income has leveled off in this recovery. If we express this in terms of a year-over-year (yoy) percentage change, we see a disturbing downward trend (a scaling factor has been applied to make the vertical scale more readable):

Figure 2.

Note that the zero on the scale which the graph appears to be trending towards indicates no growth. Below the zero point, disposable per capita income is shrinking.

To put disposable income in perspective we look at total real income (blue line), total real disposable income (red line) and income received from the government in the form of social benefits or transfer receipts (green line):

Figure 3.

It is interesting to look at the yoy changes in these three lines:

Figure 4.

Two things stand out in this graph. The first is that there appears to be an inverse correlation between the green line and the others. This is pronounced during recessions showing a transfer of income from employment sources to government benefits. The other thing that stands out is that the growth in income from social benefits is occurring faster than the growth in total employment income, not a good trend for any economy.


So how much debt does the consumer carry? If we express the total consumer credit market debt as a percentage of disposable income we get a rather nasty picture:

Figure 5.

We note that the consumer reached a debt limit of about 138% a few months before the last recession began. Subsequently, he reduced his exposure by roughly 10% but the rate of decrease has slowed and it remains to be seen if it continues.

[Aside: After posting this we read John Hussman’s essay: No Such Thing as Risk? In it he notes that once countries have created massive deficits and debt burdens beyond about 120% of GDP – typically not to accumulate productive assets and investments that service that debt, but instead to fund consumption … they are toast. It is interesting to note that the measure debt/GDP is a rough analogue to debt/income. It also coincides with the limits we proposed a month ago in Some Thoughts on Debt Saturation and Growth.]

So lets break this down to see what form the debt takes:

Figure 6.

The blue line (left-hand scale) is the total household credit market debt outstanding and peaked at about $14 trillion in 2007. Of this amount, mortgage debt peaked at around $10.5 trillion at the same time (red line). Both continue to decline meaning that existing mortgage debt is being retired either by pay down or default, at a greater rate than new mortgage debt is being incurred. This is a healthy and necessary trend for the over-leveraged consumer.

Changing to the right-hand scale, we show total credit debt (green line) of two classes, revolving (purple line) and non-revolving (orange line). Revolving credit includes credit cards and lines of credit that can be drawn on again after repayment. Non-revolving credit consists of onetime loans such as student loans and other personal loans such as automobile loans that may not be exercised for the full amount approved. The primary uptick in consumer debt is occurring in the area of non-revolving credit, principally student loans.

The Impact of Debt on Consumers

First, let’s look at the delinquency rate for consumer debt. The rate on mortgage debt (blue line below), for the period the data has been collected, reached a low of about 1.5% in 2005. Then in 2007 it took off with the sub-prime crisis and peaked in 2010 at over 11%. Unfortunately the data is quarterly and delayed at that so the picture is rather dated. Credit card delinquencies (red line) have a similar profile but peaking several months earlier around 6.75%. The total amount of delinquent credit has fallen from a peak of around $57 billion (green line) to around $34 billion at the end of 2011.

Figure 7.

Overall, delinquencies are falling indicating a gradual healing of the consumer position in the credit markets.

Next we look at the servicing costs of this debt:

Figure 8.

The blue line is the aggregate cost of interest payments to consumers. The red line is more useful in that it shows the percentage of a consumer’s disposable income that must go to servicing debt. The ratio is on a steep downward trend and could soon go bellow the lowest rates recorded in the early 1980s. This is important for providing a cushion should interest rates begin to rise. In the interim the ratio’s decline means the consumer has more money for saving or consumption. However at roughly $180 million for the total debt servicing, the extra money available is not likely to have a noticeable impact on GDP. The decline also increases the cushion consumers have against any increase in interest rates.


How much is the consumer saving? Not much. The per capita savings is shown as the blue line (left scale with an adjustment factor to read in thousands) in the graph below. The red line is the total of consumer savings.

Figure 9.

The savings rate (blue line in the graph below) is low by historical standards but has improved from the low reached in the 2002 recession. The trend would appear to be sideways. Why might this be?

Figure 10.

If we look at the effective Fed Funds rate (red line), the rate that the Fed uses to influence the economy, it appears to lead the savings rate by 2-3 years. That is, if the Fed causes rates to rise, people are encouraged to save more and spend less. The reverse is true. However, this tool broke in 2009 when the Fed funds rate reached the lower bound of zero. The economic effect has broken and the savings rate may now be moving independently of the Fed Funds rate. Other factors than yields are driving savings now, most likely fear and uncertainty in these troubled times.

The Consumer’s Balance Sheet

Finally we put it all together. The following graph shows the real (adjusted by the PCE deflator) per capita total personal assets (blue line), net worth (red line) and total liabilities (green line). A scale factor has been applied so that the left scale may be read  in thousands of dollars.

Figure 11.

We see that individual per capita net worth that peaked around 2006 at about $255 thousand fell precipitously in the financial crisis and only now has regained levels seen in the early 2000s.


The consumer’s disposable income is stagnant and vulnerable to any tax increases that may come into effect at year end – the fiscal cliff. Deleveraging is proceeding slowly with credit instrument debt rising. At a ratio of 120% debt/income, the consumer has little room and apparently little inclination to take on more debt. Moreover, with interest rates across the yield curve at historic lows and the fact that consumers are not taking advantage of this suggests that we are at a credit limit.

We remain in a liquidity trap. With short-term interest rates at zero, the only thing the Fed can do is buy assets to inject money into the banking system. However with $1.6 trillion of this money trapped inside the Fed in reserve accounts, the Fed has no influence left in the consumer economy. This is not a liquidity problem but a debt or solvency problem and the Fed cannot touch it. Until the consumer manages to significantly deleverage his balance sheet, economic growth will remain stagnant. This is why quantitative easy designed to lower interest rates will leave the economy unaffected. As a consumer was overheard speaking to Ben Bernanke: “We don’t want yer stinkin’ money.” This is well understood by the smart money that we follow but would appear to remain a mystery to officialdom.

Get ready for a lost decade or two.

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