Statement by Lawrence B. Lindsey - Statements to the Congress - Board of Governors, Federal Reserve System - Transcript

Federal Reserve Bulletin, August, 1994

I am pleased to appear on behalf of the Board of Governors of the Federal Reserve System to address issues related to consumer credit. I will focus my prepared remarks on the questions you raised in your letter of invitation.

Let me begin with some badkground. Two months ago, the U.S. economy entered the fourth year of its current expansion. Although this expansion began on a sluggish note, economic growth has been appreciable, on average, since early 1992. For example, real gross domestic product expanded 3.9 percent during 1992 and 3.1 percent during 1993. During the first quarter of this year it rose at an annual rate of 3.0 percent, in line with the expectations of growth for this year given in February by the members of the Federal Open Market Committee.

This economic expansion has resulted in moderate, but still healthy, job gains and falling unemployment. We can all be pleased with the decline in the unemployment rate to 6.0 percent in the latest survey by the Bureau of Labor Statistics.

As is usually the case, changing spending patterns in the household sector have been key to the expansion. For example, in inflation-adjusted terms, the increase in personal consumption expenditures has amounted to 71 percent of the expansion in GDP since the recovery began in the second quarter of 1991. If anything, the importance of consumption has increased as the recovery has progressed. Since the first quarter of 1993, increased consumption has accounted for 77 percent of the expansion in overall GDP. By contrast, during the economic expansion from 1982 to 1990, consumption growth was responsible for just 68 percent of the growth in GDP.

Investment in residential real estate showed a similar trend. During the current expansion, housing has accounted for 16.4 percent of the growth in GDP. During the 1980s expansion, increases in housing represented only 6.2 percent of the increase in GDP. Combining these two categories of household outlays, therefore, shows the importance of the household in the current expansion. The growth in personal consumption and housing investment constituted 87 percent of GDP growth since the expansion began, compared with 74 percent during the 1980s. Thus, the questions you asked about the financial health of the household sector and its continued access to credit are particularly pertinent in today's economic environment.

As is usually the case in economic expansions, higher levels of household debt have helped finance increased activity. As policymakers, we should recognize that households are the best judges of their own financial circumstances, so we should not view these increased levels of debt as necessarily "good" or "bad." Increased levels of household income, more optimistic attitudes toward employment prospects, and generally favorable conditions for borrowing are all contributing to the recently increased willingness of households to take on debt.

The first question in your letter asked about recent growth in consumer credit and how it compares with past expansions. It is important to consider the various types of consumer credit. The Federal Reserve has just released its report on consumer installment credit. In April, installment credit grew at a 13.2 percent annual rate after a revised 12.6 percent rate in March, slightly higher than the 11.2 percent growth during the fourth quarter of last year. It is certainly well above the full-year growth of 6 1/2 percent in 1993 or growth of just 1 percent in 1992. Indeed, the double-digit pace reached over the past half year or so is the most rapid since the third quarter of 1986.

Nevertheless, it is hard to determine conclusively how the current rate of credit expansion compares to historical norms. Recall that we are now in the fourth year of an economic upswing. As the above data indicate, growth of installment credit was quite subdued during the early portions of the current expansion. This makes qualitative comparisons of current growth with that in comparable earlier time periods somewhat problematic. The resurgence in consumer installment credit has come later than usual in the current economic expansion, and the recent pace has still been well below peak rates reached during some earlier expansion periods.

Typically, installment credit starts to climb in the first or second quarter of a recovery and is generally rising quite sharply by the second year, often reaching growth rates of 15 percent to 20 percent at some point in the cycle. In contrast, during the most recent upturn in the economy, installment credit continued to contract through the fifth quarter of recovery; its growth rate did not reach double digits until October 1993, two and one-half years into the recovery. On the other hand, the household sector entered this expansion with a higher level of debt than it had in the past, making comparison of percent increases difficult.

We should bear in mind that swings in growth of consumer credit are wider than fluctuations in the economy as a whole because consumer credit is used most heavily to finance purchases of durable goods, which are much more cyclical than consumer income or total consumption. Durable goods include autos and large consumer appliances, which often move with home sales. The strength in these two sectors has meant that durables have been particularly important in the present expansion, contributing 25 percent of increased GDP, compared with just 16 percent during the 1980s expansion.