We want to take a closer look at consumer debt and how it’s important to keep this topic within context. If you look at some of the specifics it can appear that the consumer is overextended. This is something that could be concerning from an economic standpoint. If the consumer is overleveraged like we saw back in 2006, 2007, and 2008 then the economy can become extended and can develop issues growing much further.
Breaking it Down
The first chart we want to highlight shows serious auto loan delinquencies. This is at a record high. That alone gives the appearance that the consumer surely can’t buy any more autos further indicating that the consumer is overextended. Another chart to highlight shows serious student loan delinquencies which is also at a record high.
Pulling Back the Curtain
These charts are concerning when dealing with the economy. However, if we pull the curtain back and look at total delinquencies as a percentage of household debt in comparison, it is barely moving the needle. Despite the bad numbers, when compared against the total balance sheet, they are becoming less levered. How is this possible? When you compare household debt versus assets, it’s at record levels in terms of being low. This is because as debt has gone up so has assets. Whether it be houses, stock market, bonds or other savings vehicles.
The most important number we look at in this context is interest rates. This is why we take time to discuss them so often in our vlogs. They are extremely important because it’s not just the level of debt you have it’s more about how costly it is to carry that debt. If you look at consumer leverage compared to the after-tax income, it has come down considerably since the financial crisis. Sure, auto loan and student debt delinquencies are getting to a concerning level, but when you look at the ability of the overall U.S. consumer to service that debt along with U.S. consumer balance sheet, it still looks very strong. Even though there are pockets of weakness, overall, we should see a long runway of consumer leveraging and that could possibly help the U.S. economy extend this growth period into the future.
Trey Booth, CFA®, AIF®
Senior Vice President
Email Trey Booth here
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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