How did the 2007–2009 recession alter household behavior?

How did the 2007–2009 recession alter household behavior?

During the financial crisis, which began in August 2007, and the resulting recession, which began in December 2007, the trend towards increased household leverage reversed itself. There are three likely scenarios: either households are borrowing less or paying down their existing debt—or both.

First, let’s see how household net borrowing (the difference between borrowing and saving during a period), has changed over time.

Chart 4

As shown in Chart 4, household net borrowing (home mortgages, consumer credit, and other loans and mortgages) grew sharply from the late 1990s until 2006. Net household borrowing peaked at around $1.34 trillion in the second quarter of 2006 before falling sharply and actually turning negative (meaning that households became net lenders) in the last two quarters of 2008 (-$73 billion and –$232 billion, respectively) and the first quarter of 2009 (-$156 billion). This shift from net borrowers to net lenders for the sector was dramatic; this was the first time since the Federal Reserve’s Flow of Funds data started being reported in 1952 that the household sector was a net lender.

Next, we see if this dramatic change is also reflected in the personal saving rate:

Chart 5

Chart 5 indicates that households are saving a much larger share of their disposable personal income. In the first quarter of 2008, the personal saving rate matched an all-time low of 1.2 percent of disposable personal income (on a quarterly basis); by the fourth quarter of that same year, the saving rate had climbed to 3.8 percent (on a quarterly basis), the highest it had been since 2002.

These changes in household behavior have important implications for consumer spending and overall economic performance. The increased saving rate—a result of consumers’ attempt to protect themselves against increased economic and financial uncertainty following the onset of the financial crisis and recession—also means a smaller share of each dollar of income will be spent on goods and services.

Conclusion

We now have a better picture of what is driving the recent episode in household de-leveraging. The ratio of household debt service to disposable personal income is falling, primarily as a result of a decline in household debt outstanding. The flow of funds data show an even more dramatic switch, as households became net lenders in the last two quarters of 2008 and the first quarter of 2009, a development that is consistent with the sharp jump in the saving rate over the past year.

At mid-year 2009, we can only speculate on future trends in the ratio of household debt to disposable personal income. We do know that future trends may depend on whether the changes in borrowing patterns and household saving behavior are temporary reactions to the financial crisis and ensuing recession, or whether they reflect longer term changes in household borrowing and saving behavior. Stay tuned