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Posted by: Michael Mandel on February 12
Every three years the Federal Reserve does an extensive survey of consumers to find out about their financial position. This afternoon they released the results of their 2007 Survey of Consumer Finances, a very lengthy document. As the name suggests, the survey was done in 2007, before the financial crisis hit.
So here’s the question: Does the survey give any warning signs that consumers were overstressed and that the sky was about to fall down?
The short answer is basically no. You can see the subprime crisis developing in the numbers but on most of the key national measures, U.S. consumers look little different than they did in 2004, or in 1998. That’s fascinating, sobering and humbling, because even with the benefit of hindsight it’s difficult to see the dangers ahead.
Here are some examples. The leverage ratio—the ratio of debt to assets—actually dropped somewhat from 2004 to 2007, going from 15% to 14.9%. By these numbers, overall households were actually better off in 2007 than in 2004.
But in hindsight you can actually see the subprime problems taking hold in the data. In the early part of the decade, the leverage ratio rises for high school grads and people with some college. Then between 2004 and 2007 the leverage ratio for people without high school diplomas rose from 14% to 18.2%, as lenders reached down to people who would not have qualified in the past.
Another example: The median holdings of debt, adjust for inflation, only rose from $60,700 to $67,000 from 2004 to 2007, a 10% increase. That’s not very much over a three years period. Two exceptions: Median debt for people without high school diplomas rose roughly 50%, while median debt for nonwhite or hispanic rose roughly 30%. Once again, signs of subprime issues.
Another example: The ratio of debt payments to family income only ticks up slightly, from 14.4% in 2004 to 14.5% in 2007. Both of those numbers are lower than the 14.9% in 1998. What’s more, the percentage of debtors with payments 60 days or more overdue actually fell from 8.9% in 2004 to 7.1% in 2007. On the other hand, the percentage of debtors paying out more than 40% of their income to service loans rose to 14.7%.
My conclusion: The ambiguity of these figures helps explain, a bit, why even smart people didn’t see this coming. I will give the link to the full Federal Reserve article after it is released this afternoon.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.