Data on past consumer deleveraging during recessions

I found the recent consumer credit data unsatisfying because the data seemed to point in two directions. The seasonally-adjusted data showed a large $12 billion decrease in consumer credit which received headlines. Meanwhile, the non-seasonally adjusted data showed a large $7 billion increase in consumer credit. I suspect this divergence has a lot to do with cash-for-clunkers (post here), but we can’t be 100% sure until we get another month or two of data.

Let’s delve into this issue a bit more because we are at  a critical stage in the economy right now. A lot of pundits are talking about a V-shaped recovery, while others are pointing to a secular move toward consumer deleveraging which basically spells no recovery.

I am somewhere in between, believing we will get a weak recovery that could or could not last more than a couple of years depending on the path of consumer deleveraging. While I do believe the U.S. economy is fast approaching ‘terminal debt,’ I am not convinced we are there in this particular cycle, largely due to the massive stimulus and easing. The posts which best outline this view are two recent ones, “The recession is over but the depression has just begun” and “A brief look at the Asset-Based Economy at economic turns.”

So, here are my questions on consumer credit:

  • What happened to consumer credit in past downturns? 
  • Specifically, how much did it decline from peak to trough?
  • Was the decline mirrored by a similar fall in output as measured by nominal GDP?
  • Is the pattern this time around any different?
  • And what does that say about the thesis of secular deleveraging?

The way I am going to attack these questions is by looking at past recessions and peak-to-trough declines in both nominal GDP and consumer credit (note: the credit series is monthly, but the GDP series is quarterly – and I am leaving out the recessions in 1945 and 1949 because of wartime anomalies).  Here goes.


  • GDP declined 1.8% peak to trough. Consumer Credit declined 1.6%. It took 8 months to hit the previous credit peak.


  • GDP declined 2.7% while credit declined 1.6% from January to June of 1968.It took 11 months to hit the previous credit peak.


  • GDP declined 1.0% and credit also declined 1.0%.It took 8 months to hit the previous credit peak


  • Nominal GDP did not decline due to inflation. Credit did decline from October to November 1970 by 0.2% however.It took 2 months to hit the previous credit peak.


  • Again inflation meant nominal GDP did not decline. Meanwhile credit declined 1.8% from September 1974 to June 1975.It took 13 months to hit the previous credit peak.


  • Again inflation meant nominal GDP did not decline. Meanwhile credit declined 1.8% from February to June 1980.It took 12 months to hit the previous credit peak


  • GDP declined 0.3% and credit also declined 0.1%.It took 2 months to hit the previous credit peak.


  • Inflation meant nominal GDP nearly did not decline (down –0.08%). Meanwhile credit declined 2.0% from November 1990 to well past the recession’s end in June 1992. It took an enormous 27 months to hit the previous credit peak. This was the worst credit cycle to date.


  • We cruised through this recession with neither a decline in nominal GDP or credit.


  • GDP declined 2.7% and credit has already declined a massive 4.6%. This is the largest decline in consumer credit to date.


The table of data looks like this:


I draw the following conclusions :

  • In an economic downturn, consumer credit has generally declined more than nominal GDP.
  • The 1990-91 recession saw a very drawn out drop in credit and easily generated the longest time before credit regained its previous peak.
  • The 2001 recession was unusual mild as it was the only time in the last 56 years that the U.S. has experienced a recession without a drop in consumer credit.
  • The 2007-2009 recession has been unusually severe. The drop in nominal GDP is the largest in the last 56 years. However, the drop in consumer credit has been even worse at more than twice the largest previous decline.

None of this necessarily helps me decipher whether we are in a secular deleveraging cycle. But, the severity of the fall-off in consumer credit relative to output may point in this direction.

  1. aitrader says

    I think you also need to factor in the commercial failures (including commercial credit losses) sweeping the globe right now. We did have a 3rd quarter of “less bad” earnings so far with Alcoa leading the way. It is not all that surprising to us entrenched bears that a quarter or even two of “less bad” numbers may occur after trillions in government printing has flooded the globe with liquidity.

    The key problems are the drop in consumer demand and resulting drop in commerce. And I wonder if the Alcoa (and possibly other firms’) numbers aren’t due in part to shedding lots of employees, consultants, etc. that may help their profit for a quarter or two but will push them (and others) over a cliff as demand dives even further.

    Take a look at the BDI. It was around 2200 last I checked. The break even figure for shippers is supposed to be $3200 on average. How can these earnings numbers be positive, at least long term, when trade is basically collapsing?

    I just don’t buy it.

    And don’t even get me started on Europe’s problems and what I believe will be bank collapse round two in November…!

  2. Anonymous says

    Interesting Analysis. Considering this downturn was caused due to excessive debt and a banking collapse, is this comparison still valid? Would you not expect this big drop in consumer credit?

  3. Anonymous says

    When looking at non-revolving credit, which increased 11.3 billion NSA from July to August, it is clear that Cash for Clunkers and student loans caused the month-to-month jump, and, likely, are one-offs.

    The real focus of consumer credit should be directed toward revolving debt – credit cards – which for the first time ever is declining year-over-year, in August at a 7.8% annual pace NSA. Considering revolving consumer credit grew this decade at 5.5% annually through 2008, and grew 11.0% annually for almost 30 years, from 1979 to a 2008 peak of $988 billion NSA, the nearly $90 billion reduction (NSA) from Dec. 2008 to Aug 2009 is meaningful and would equate to an absence of consumption of about 1.2% of GDP for 2009 including the 5.5% growth which did not occur.

    That is a collapse in revolving consumer credit, and the spending represented by it is not coming back anytime soon, if ever. It’s a component of the reset of GDP to a permanently lower level in the absence of significant inflation.

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