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VOL. 11, NO. 3 • APRIL 2016

DALLASFED

Economic
Letter
Increased Credit Availability,
Rising Asset Prices Help Boost
Consumer Spending
by John V. Duca, Anthony Murphy and Elizabeth Organ

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ABSTRACT: A combination of
much less household debt,
revived access to consumer
credit and recovering asset
prices have bolstered U.S.
consumer spending. This trend
will likely continue despite
an estimated 50 percent
reduction since the mid-2000s
of the housing wealth effect—
an important amplifier during
the boom years.

U

nderstanding aggregate consumer spending is important.
Consumer spending accounted
for more than two-thirds of U.S.
gross domestic product (GDP)
in 2015 and for 1.5 percentage points of
the 2.0 percentage-point average GDP
growth in the past five years.
Access to credit and the amount and
composition of wealth greatly influence
household consumption and saving. In
the U.S., increased availability of consumer
and mortgage credit, along with rising
asset prices, contributed greatly to the consumption boom in the mid-2000s; reversals in these factors exacerbated the bust in
consumption during the Great Recession.
Debt accumulated during the boom
years restrained consumer spending for
several subsequent years, and the housing
wealth effect is only half what it was in the
mid-2000s. More recently, however, large
reductions in household indebtedness,
revived access to consumer credit (credit
not secured by real estate) and recovering
asset prices have helped bolster U.S. consumer spending and will likely continue
to do so.

Drivers of Consumer Spending
Aggregate consumer spending and
savings depend on a range of factors

including the usual suspects—incomes,
aggregate wealth and interest rates. Higher
incomes and household wealth boost
spending. Higher, real (inflation-adjusted)
interest rates—which encourage consumers to save—reduce current spending.
Additionally, consumer spending varies
notably with the availability of consumer
credit and the ability to borrow against
housing wealth—factors that merit attention here.
The ratio of consumer spending to
income—the proportion of income that
people spend—strikingly increased from
the early 1980s to the mid-2000s (Chart 1).1
The ratio rose from about 89 percent to 96
percent, peaking at almost 97.5 percent in
2005. With the onset of the Great Recession
in late 2007, the ratio fell as consumers
saved more.
The ratio slipped into a trough at 92.5
percent in 2012, raising fears that the savings rate would stay relatively high and
future consumer spending would be weak.
Those concerns proved unfounded, with
the ratio subsequently rising to around 95
percent, where it has remained for the past
three years.
Changes in the availability of consumer
credit explain much of the rise in consumer spending relative to income between
1980 and 2006. Increased access to con-

Economic Letter
Chart

1

Ratio of Consumer Spending to Income Recovers
from Postrecession Drop

Percent

98
96
94
92
90
88
86
1980

1985

1990

1995

2000

2005

2010

2015

NOTE: Shaded areas are National Bureau of Economic Research dated recessions.
SOURCES: U.S. National Income and Product Accounts; authors’ calculations.

Chart

2

Supply of Consumer Credit Steadily Increases

Index: 1966:Q2 = 100, maximum = 1

1.2
1.0
Index of consumer
credit conditions

0.8
0.6
0.4

Wealth Effects Vary

0.2
0.0
1980

1985

1990

1995

2000

2005

2010

2015

NOTE: Shaded areas are National Bureau of Economic Research dated recessions.
SOURCE: “How Financial Innovations and Accelerators Drive U.S. Consumption Booms and Busts,” by John V. Duca,
John Muellbauer and Anthony Murphy, manuscript, April 2016.

sumer credit reduced the need for precautionary “saving for a rainy day,” research
shows.2 Chart 2 depicts a consumer credit
index measure that captures changes in the
supply of consumer credit.3
Since the 1970s, improvements in
financial technology reduced lenders’ cost
to review credit applicants and process
loan payments. As a result, it became easier to acquire credit cards and auto loans.
Credit availability also rose in the early
1980s following federal deregulation of
interest paid on bank deposits and again in
the late 1980s with the advent of securitiza-

2

percent in the mid-1980s to around
95 percent in 2000, largely because of
increased mortgage debt (Chart 3). The
ratio shot up during the subprime boom
years—as mortgage lending standards
were relaxed—and eventually peaked at
135 percent in late 2007.
One factor that increased households’
ability to borrow against home equity
was the greater prevalence of home
equity loans. They gained popularity following the Tax Reform Act of 1986, which
removed the tax deductibility of interest
on consumer—but not mortgage—loans.
Another factor was the rise of cash-out
mortgage refinancing, a financial innovation that enabled households to increase
the mortgage debt on their appreciated
homes when they refinanced mortgages.
Additionally, the decline in down payment requirements during the subprime
boom notably contributed to the higher
mortgage debt-to-income ratio.4
Since the Great Recession, the ratio
of household debt-to-income has fallen
back to about 107 percent, a more sustainable—albeit relatively high—level.
The reduction in mortgage leverage was
due to a combination of fewer mortgage
originations (fewer home sales and
tighter mortgage lending standards),
more foreclosures and loan charge-offs
and “active” mortgage deleveraging by
consumers.

tion—the bundling of receivables into debt
securities that were subsequently resold to
investors.
Consumer credit availability rose in
the early 2000s, before retreating during
the Great Recession. It has risen since 2010,
as consumer balance sheets improved and
loan delinquency rates fell, and is now
higher than it was in 2007 before the Great
Recession.

Mortgage Debt and Deleveraging
The ratio of household debt to
income rose steadily from about 80

During the early to mid-2000s, household wealth (net worth) rose significantly
(Chart 4).5 The wealth-to-income ratio
rose from about 530 percent in fourth
quarter 2003 to 650 percent in mid-2007
as equity and house prices surged. Not
surprisingly, consumer spending also
jumped.
The conventional estimate of the
wealth effect—the impact of higher
household wealth on aggregate consumption—is 3 percent, or $3 in additional spending every year for each $100
increase in wealth.
In practice, however, wealth effects
vary by type of asset. Liquid assets such as
bank deposits are more spendable than
illiquid assets such as pension contributions. Likewise, consumer and mortgage
debt—which can be regarded as negative liquid assets—have a large depress-

Economic Letter • Federal Reserve Bank of Dallas • April 2016

Economic Letter
ing effect, reflecting significant potential
penalties (such as losing a home) that
households face for not making loan payments. Housing wealth or collateral effects
are also likely to vary over time as credit is
liberalized or tightened.
Recent research suggests that the
spendability, or wealth effect, of liquid
financial assets—almost $9 for every
$100—is far greater than the effect for illiquid financial assets, which explains why
falling equity prices do not generate larger
cutbacks in aggregate consumer spending (Table 1). Other things equal, higher
mortgage and consumer debt significantly
depress consumer spending. This effect
was masked during the boom years of the
2000s, when equity and house prices were
rising, but became more apparent with the
onset of the Great Recession.

Housing Wealth Effect Halved

Table

1

How Much of a $100 Rise in Wealth Is Spent?
Source of rise in wealth
Liquid assets
minus debt

Other net
financial assets

Housing

$8.8

$1.5

$2.1 in mid-1995
$3.4 in mid-2005
$1.7 in late 2015

NOTE: The table shows the estimated wealth effect by type of asset. Net liquid assets = deposits (including money
market shares) + debt securities – consumer loans – home mortgages. Other net financial assets include corporate
equities, mutual fund shares and pension entitlements.
SOURCE: “How Financial Innovations and Accelerators Drive U.S. Consumption Booms and Busts,” by John V. Duca,
John Muellbauer and Anthony Murphy, manuscript, April 2016.

Chart

3

Household Leverage Has Fallen Since 2007

Percent

140
120

The estimated housing wealth effect
varies over time and captures the ability
of consumers to tap into their housing
wealth (Chart 5). It rose steadily from
about 1.3 percent in the early 1990s to
a peak of about 3.5 percent in the mid2000s. It has since halved, to about the
same level as that of the mid-1990s.
During the subprime and housing
booms, rising house prices and housing
wealth effects propagated and amplified
expansion of consumption and GDP.
During the bust, this mechanism
went into reverse. High levels of mortgage debt, falling house prices and a
reduced ability to tap housing equity
generated greater savings and reduced
consumer spending.6 Fortunately, house
prices have recovered, deleveraging has
slowed or stopped, and consumer spending is strong, even though the housing
wealth effect is only half as large as it was
in the mid-2000s.

Total debt
to income

100
80

Mortgage debt
to income

60
40

Consumer debt
to income

20
0
1980

When viewing the U.S. evidence, it
is important to keep in mind that there
is no “one size fits all” model of consumer spending that applies everywhere.
Specifically, housing wealth effects vary
by country. They are positive in the U.K.
and U.S.—where consumers can borrow
against net wealth in their houses—but
negative in Japan, for example, where
existing homeowners cannot as easily do

1990

1995

2000

2005

2010

2015

SOURCES: Z.1 Financial Accounts of the United States, Board of Governors of the Federal Reserve, March 2016; authors’
calculations.

Chart

4

Household Wealth Recovers Since Great Recession

Percent of disposable personal income

700
600

Net worth

500
400

Housing Wealth Elsewhere

1985

NOTE: Shaded areas are National Bureau of Economic Research dated recessions.

300

Equities + other
illiquid
financial assets

Gross
housing assets

200
Net liquid assets
(liquid assets – debt)

100
0
–100
1980

1985

1990

1995

2000

2005

2010

2015

NOTE: Shaded areas are National Bureau of Economic Research dated recessions.
SOURCES: Z.1 Financial Accounts of the United States, Board of Governors of the Federal Reserve, March 2016; authors’
calculations.

Economic Letter • Federal Reserve Bank of Dallas • April 2016

3

Economic Letter

Chart

5

Housing Wealth Effect Halved Since Mid-2000s Peak

Percent*

4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
1980

1985

1990

1995

2000

2005

2010

2015

*Percent increase in wealth attributable to housing.
NOTE: Shaded areas are National Bureau of Economic Research dated recessions.
SOURCE: “How Financial Innovations and Accelerators Drive U.S. Consumption Booms and Busts,” by John V. Duca,
John Muellbauer and Anthony Murphy, manuscript, April 2016.

so and where there has been little credit
liberalization.
In Japan, rising residence prices negatively affect consumer spending, since
higher savings are required for the down
payment for a house. Japanese households also appear to be very forwardlooking and, rather than spend against
rising house prices, prefer to pass on any
house price gains to future generations
who need a place to live. 7

Bolstered Consumer Spending
Consumer spending during the Great
Recession was depressed by falling wealth,
reduced ability to draw on consumer credit
or borrow against net housing wealth, and
large payments on high levels of previously
borrowed debt.

DALLASFED

In recent years, a combination of
reduced household indebtedness, revived
access to consumer credit and recovering
asset prices have bolstered U.S. consumer
spending and will likely continue to do so.
Duca is a vice president and associate
director of research, and Murphy is an economic policy advisor and senior economist
in the Research Department of the Federal
Reserve Bank of Dallas. Organ, previously
a research analyst in the Research Department, is a Furman Public Policy Scholar at
New York University School of Law.

for personal consumption expenditures (PCE) and disposable personal income variables in the U.S. National Income
and Product Accounts, www.bea.gov/national/index.htm.
2
See “How Financial Innovations and Accelerators Drive
U.S. Consumption Booms and Busts,” by John V. Duca,
John Muellbauer and Anthony Murphy, manuscript, April
2016. The authors estimate a two-equation, time series
model of consumer spending and mortgage refinancing,
with a time varying housing collateral (“wealth”) effect.
3
See note 2. The consumer credit index in Chart 2 is
derived from the net percentage of domestic banks reporting
increased willingness to make consumer installment loans
in the Senior Loan Officer Opinion Survey on Bank Lending
Practices.
4
See “House Prices and Credit Constraints: Making Sense
of the U.S. Experience,” by John V. Duca, John Muellbauer
and Anthony Murphy, The Economic Journal, vol. 121,
no. 552, 2011, pp. 533–51, and “How Mortgage Finance
Reform Could Affect Housing,” by John V. Duca, John
Muellbauer and Anthony Murphy, American Economic Review, vol. 106, May 2016. Mortgage lending standards are
proxied by the loan-to-value ratios of first-time homebuyers,
a key marginal group of buyers.
5
Household wealth or, more formally, the net worth of
households and nonprofit organizations, equals the sum
of the value of nonfinancial assets (such as real estate) and
financial assets less financial liabilities. See the balance
sheet Table B.101 in www.federalreserve.gov/releases/z1/
current/.
6
For example, Fannie Mae and Freddie Mac have charged
higher fees for cash-out mortgage refinancing since 2007.
7
See “Credit, Housing Collateral and Consumption:
Evidence from the U.K., U.S. and Japan,” by Janine Aron,
John V. Duca, John Muellbauer, Keiko Murata and Anthony
Murphy, The Review of Income and Wealth, vol. 58, no. 3,
2012, pp. 397–423.

Notes
Chart 1 plots the average propensity to consume (APC) in
percentage terms. The savings rate is 100 minus the APC.
Consumer spending and household income are shorthand
1

Economic Letter

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