Scary Chart for the Day: Private Sector Debt

Here I pointed out a troubling rate of change in the number of unemployed which in the past has preceded recession with alarming accuracy.

Here is a post that compares the stock market bubble to the real estate bubble in terms of how large each grew relative to GDP. (My buddy Bonddad picked up on this one and called my chart "scary." With that in mind, I'm going to try to run an irregular series of Scary Charts as time and economic data allow.)

Here's a chart detailing how much heavy lifting the consumer has been doing and questioning how long that trend can last.

Lastly, here is a chart showing the trend in non-manufacturing ISM Business Activity, which has now collapsed.

In short, in addition to some troubling short-term trends, there are some even more troubling long-term trends. Tonight's Scary Chart provides another:

Source: Federal Reserve, Bureau of Economic Analysis

The data above comes from the Fed's Flow of Funds report -- LA154102005, LA144104005, LA794104005 -- and the Bureau of Economic Analysis. The three series from the Fed represent Total Debt Outstanding for Households (LA154102005), Businesses (LA144104005), and Domestic Financial Institutions (LA794104005, which gets listed separately in the Flow of Funds report). In other words, Private Sector Debt Outstanding, the numerator. The part of the data that comes from the Bureau of Economic Analysis is the GDP data. For the purpose of comparing apples-to-apples, the GDP number is GDP minus Government Spending/Investment. In other words, Private Sector GDP, the denominator.

Since about 1998 or so it's obvious that Private Sector Debt as a Percent of Private Sector GDP has exploded. Again, the questions must be asked: Is this trend sustainable, and if not, how will this dislocation resolve itself? Will the numerator (private debt) decline? Will the denominator (GDP) increase? Some combination of the two? And how fast could that happen? What would be the likely consequence of a mean reversion of this ratio?

We are witnessing an implosion of the housing market, and along with it we're seeing credit standards being tightened to record levels (according to this week's Fed Senior Loan Officer Survey, which I pointed out here). Along these same lines, I would note an article appearing just today in the Wall St. Journal, the title of which was Credit-Card Pinch Leads Consumers To Rein In Spending. The mortgage market has tightened dramatically, the credit card market is in the process of doing the same. What are the implications for the chart I've presented?

Here are the first three grafs from the Journal story:

America's love affair with credit cards may be headed for the rocks.

Credit-card delinquencies are rising across the nation, a sign that some Americans are at the end of their rope financially. And these mounting delinquencies, in turn, have prompted banks to tighten lending standards, keeping people who have maxed out their cards from finding new sources of credit.

The result could be a sharp pullback in consumer spending that would further weaken the slowing U.S. economy.