Here’s two clear charts that capture the work the American consumer is doing, with some aggressive prodding from a financial services industry that is clamping down on credit every way it can.
The first chart shows trends in Consumption and Real Household Net Worth from the mid-1960’s to today. Recessions are indicated by the grey bar. The second chart shows the change in outstanding consumer credit from 2005 to today. (Again, the great recession is indicated by the grey shaded area.
From the early 1980s to the beginning of this century, consumption increased as a percentage of household worth. This trend was not driven by real wage growth, but by the ability to borrow more money against future earnings.
By 2002, consumer debt secured by wages was basically tapped out. The growth in consumption in the 5 years following that was spurred by the housing bubble, which used booming home prices and easy access to equity loans to fuel more consumption in the economy.
Today, the consumer is back to living on their wages, with the ability to borrow against future wages highly constrained. The relationship we see between these three data sets — consumption, household net worth and consumer credit — are going to continue along these lines for the foreseeable future. This is the most important statistic in the recovery: the consumer balance sheet.
