Consumer Debt Load of $12.7 Trillion Saps
Spending Power
Friday, 11 Aug 2017 11:57 AM
After deleveraging in the aftermath of the last U.S.
recession, Americans have once again taken on record debt loads that
risk holding back the world’s largest economy.
Household debt outstanding — everything from mortgages to
credit cards to car loans — reached $12.7 trillion in the first quarter,
surpassing the previous peak in 2008 before the effects of the housing
market collapse took its toll, Federal Reserve Bank of New York data
show. To put the borrowing in perspective, it’s more than the size of
China’s economy or almost four times that of Germany’s.
People are borrowing more not necessarily because they’re
confident about their financial prospects. They’re doing it for
necessities like education or transportation and, in many cases, just to
get by.
On the surface, liabilities at an all-time high aren’t
alarming when the assets side of ledger is taken into account. Household
net worth stands at a record $94.8 trillion, thanks to rebounding home
values and soaring stock portfolios. But that increase has primarily
benefited the nation’s wealthiest, said Lance Roberts, chief investment
strategist at Clarity Financial LLC in Houston and editor of the Real
Investment Advice newsletter.
“When you look at net worth, it’s heavily skewed by the top
10 percent,” Roberts said. “The average family of four is living
paycheck to paycheck.”
For most Americans, whose median household income, adjusted
for inflation, is lower than it was at its peak in 1999, borrowing has
been the answer to maintaining their standard of living. The increase in
debt helps explain why the economy’s main source of fuel is providing
less of boost than in the past. Personal spending growth has averaged
2.4 percent since the recession ended in 2009, less than the 3 percent
of the previous expansion and 4.3 percent from 1982-90.
A look at worker pay presents a more dire backdrop for
discretionary spending for those without a lot of assets. While the
difference between income from wages and household debt has improved
since the last recession, it’s been leveling off and remains at a
depressed level. The improvement also reflects less mortgage debt
because of increased home foreclosures, rather than a pickup in
earnings.
“This increase in leverage has sapped our ability to
spend,” Roberts said. “I think we’re stuck.”
Stocks may be at record highs but plenty of households
aren’t participating, according to a recent Gallup survey.
Tapping home equity via lines of credit, which provided
more funds for spending in the years for the last downturn, is less
of an option now as well. That’s because home ownership rates are
hovering close to the lowest level since the 1960s and more people
rent.
Demographics are also playing a role. Millennials, those
born in the early 1980s through the late 1990s, are now the biggest
living generation in the U.S. They’re also more likely to be saddled
with student debt. The New York Fed’s latest quarterly report on
household borrowing and credit shows strains are developing as 11
percent of educational debt was either 90-plus days delinquent or in
default in the first quarter.
Car sales, while recently showing signs of rolling over,
have been an economic mainstay over the past several years. But for
all those cars rolling off dealer lots, more Americans have car
payments. Motor vehicle loan liabilities are at an all-time high.
The chart above also shows more car loans are
delinquent. While the share of late payments remains below the 5.3
percent peak reached 1 1/2 years after the last recession, they are
creeping higher. Credit-card default rates also show some very early
signs of stress developing, though they too are very modest.
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