Monday, September 22, 2014

The Household Fiscal Gap

One of the issues that hit households very hard during and since the Great Recession was the high level of household indebtedness.  As we know, during the first half of the 2000s, many American households used their homes as cash machines, taking out loans to buy big ticket items by cashing in on the dwindling equity of their personal real estate holdings.  When the bottom fell out of the housing market, many of these borrowers were left high and dry, having "over borrowed".  In this posting, I'd like to take a look at what I call the "household fiscal gap", the difference between what American households as a whole earn and what they borrow.

Let's look at the income side first.  Here is a graph showing the total wages and salary earned by all American households back to 1947:

In the second quarter of 2014, total annual wages and salary earned hit $7.443 trillion.  You will notice that wages and salary have grown pretty consistently since 1960, falling only twice; during the 2001 recession when the total earned fell from $4.983 trillion to $4.937 trillion, a drop of 0.9 percent and during the Great Recession when the total fell from $6.541 trillion to $6.231 trillion, a more significant drop of 4.7 percent as shown on this graph:

That said, it is interesting to note that the annual rate of total earned income growth has fallen to an average of 2.3 percent since 2009 compared to growth in excess of five percent throughout most of the rest of the five decades since the 1960s.  In fact, including all of the downturns, between 1947 and 2009, total employee wage and salary accruals grew by an average of 6.6 percent annually, well more than twice the growth rate since 2009.

Now, let's look at the debt side.  Here is a graph showing the total household credit liability since 1949:

Right now, households are sitting on $13.342 trillion worth of credit, down 6.3 percent from the peak of $13.969 trillion in the first quarter of 2008.

Here is a graph showing the annual percentage increase in total credit (in blue) and the rate of growth of total earned income (in red) for comparison:

Notice that between 2000 and 2007 there is a big gap between the blue line and the red line?  This shows us the significant and historically high difference between the rate of annual growth in total consumer credit (in blue) and the rate of annual growth in total employee compensation (in red).

Now, let's subtract the accrued wages and salaries from total household credit:

This is what I refer to as the "household fiscal gap" or the difference between what all households bring in as income and what they owe in total.  Note that all the way to the mid-1980s, household income kept pace with household debt.  This situation changed in 1984 when debt began to outstrip income, hitting a peak in 2008.  In the second quarter of 2014, the fiscal gap was $5.898 trillion, down from its peak of $7.507 trillion in the first quarter of 2009 and has been at or around this level since the third quarter of 2012.  

On the preceding graph, you'll notice that the curve steepens substantially after 2000 as more and more Americans borrowed more and more and saw the growth rate of their earnings decline.  Here is a graph showing how the rate of growth of the household fiscal gap has changed over time:

Prior to 1984, the fiscal gap was generally negative; households as a whole generally earned more than they borrowed as a whole.  After 1984, things changed and the sum total of American households gradually borrowed more than they earned but credit growth was not substantially faster than growth in total wages and salaries with credit growth generally exceeding salary growth by less than $50 billion annually.  The situation changed markedly in 2000 when the rate of total consumer debt growth far outstripped the growth in wages and salaries; during the period between 2000 and 2007, credit growth exceeded salary growth by as much as $300 billion annually.  The party came to an abrupt end at the end of 2007 as households cut back on their credit habits and once again, total credit growth was exceeded by total salary growth.  That said, you will notice that right at the tail end of the graph, the growth in total household credit is rising again, however, the growth is nowhere near the levels seen between 2000 and 2007.

The household fiscal gap goes a long way to explaining why the economic retrenchment during the Great Recession was so deep and why the economic fallout was so painful.  In total, America's consumers were living way beyond their means and salary growth was not keeping up with the growth in credit.  While, as a whole, consumer debt is rising once again, it is rising at relatively tame rates, rates that are just low enough that America's consumer-driven economy is not growing at anything approaching normal inter-recessional rates.  When we see the household fiscal gap rising at rates that were seen during the early 2000s, then we should be worried.  Until then, we'll have to be satisfied with tepid economic growth.


  1. Now this analysis, along with your take on the Fed, offers a "complete" picture. Nice work PJ.