The Thrifty Consumer is an Urban Legend
If you’ve been reading business news or listening to an economics podcast over the past two years you’ve likely been led to believe that post-recession consumers are smarter, more frugal and finally scurrying away some money in an account rather than engorging themselves on high-limit, high-interest credit cards.
At the heart of this is a surface level reading of the overall consumer revolving debt load. Q1 2009 showed the national consumer revolving credit tab at just over $923 billion. Q4 2010 showed a total consumer revolving credit debt of $825 billion. Hooray. Isn’t it nice to see the average consumer wise up and start to lower his or her astronomical credit card bill? This would be appear to be especially pleasing since easy credit access across the income spectrum was a significant contributor to our recent economic woes.
Before you get too jubilant, you may want to take a moment to put down your party hat and take a look at the rest of the ledger.
While revolving consumer credit debt decreased by 9 percent over the two-year period (an astronomical number by any standard of expectation), a report by CardHub shows that the decrease was not at all the result of parsimonious consumers taking responsibility for their debt. Rather, it was the exact opposite with massive bank and credit provider charge offs. While revolving debt shrank by $79.5 billion, banks and creditors actually wrote down (i.e. just gave up and marked the account as a loss) a mind-blowing $224.1 billion. It seems houses weren’t the only obligation consumers were walking away from.
It’s important to note that these numbers, while recent, only run up to the end of 2010. A more recent study by Credit-Land.com shows that the trend of consumers walking away from their credit debt is reversing and the steady downtrend in overall revolving credit debt is also coming to a halt. The report, supplemented by data from the Federal Reserve, shows that consumer debt is back on the rise, with delinquencies on the decline. This is important for two reasons:
1. It indicates a more confident consumer ready to whip out the card and purchase again.
2. This is great news in a way for the economy. However…It shows that consumers themselves may have not learned that much after all.
So before you march off to shift away from quality and more towards a deeply-discounted savings proposition, beware that the fundamentals rationalizing this assumption may not be all that solid. The perceived value consumer is more likely the same as they were three years ago, only conditioned to expect massive savings opportunities from bootstrapping retailers looking to move inventory in tough times. As the need for retailers to continually slash prices fades with rising sales and earnings, the value consumer will likely shift in tandem.