Consumer Debt and the Housing Bubble

The Fed released data for consumer debt for July on Friday. The release got little attention, and the short pieces that did cover it mostly focused on the slower rate of growth. The growth in consumer credit overall slowed from a 7.3 percent annual rate in June to a 2.8 percent rate in July. For the revolving debt component (primarily credit card debt), the slowdown was much sharper, from 13.2 percent in June to a 3.4 percent rate in July.

I had previously noted the sharp uptick in credit card debt as evidence of the bursting of the housing bubble. When houses stop appreciating, people are forced to borrow against their credit cards instead of their homes. This new report doesn't change my mind. The reason is that the growth rate for credit card debt was revised sharply upward for the prior two months. The growth rates previously reported for May and June were 11.0 percent and 9.8 percent, respectively. These numbers were revised upward in yesterday's report to 13.0 and 13.2 percent. This brings the annual rate of growth in credit card debt over the last three months to 10.3 percent. By comparison, credit card debt grew at an average annual rate of 3.2 percent from 2002-2005.

The moral of the story is that it still looks like there is a big shift towards credit card debt, a predictable outcome of weakening housing prices.

--Dean Baker

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