How big is the market for consumer debt
Financial Column: Some Excesses Occur in US Consumer Debt; US consumer credit has soared to a new high
by Adolfo Laurenti, Global Economist, Bank J. Safra Sarasin AG
US consumer debt is rising to a new high in absolute terms, but remains stable relative to GDP. Some excesses are evident in student and auto loans. The debt could negatively affect consumer spending in the future.
Europeans are used to keeping an eye on US debt, especially after the last credit-led boom-and-bust cycle sparked the global financial crisis. The latest news is, in part, unsettling. Consumer debt rose to a new high of $ 12.8 trillion in the second quarter. However, the good news is that household debt relative to gross domestic product (GDP) has stopped growing. Since 2013, consumer debt as a percentage of nominal GDP has remained remarkably stable at around 66%.
Still, the aggregated data hide some significant shifts in the composition of debt. Mortgage debt, which accounts for around two thirds of all debt, has fallen by around 5% since 2009. Credit card debt has also fallen 7% from its previous peak. On the flip side, auto loans increased 55% and the most dramatic increase at 102% was student loans.
Student loans are now the second largest form of US household debt. This is a particularly problematic trend as the burden on these loans is disproportionately high on younger generations. For millennials, the debt burden becomes an important factor in many life cycle decisions, such as starting a family, buying a house, changing jobs, or starting a business.
As an immediate concern, one may wonder whether the rise in auto and student loans has been driven by a weakening in lending standards, which increases the credit risk for some financial products. There is some evidence of easing auto loan standards between 2010 and 2015, but it appears to have reversed in part over the past two years. Overall, there is no feeling of reckless lending in this segment of the market.
There are two main implications for the economic and market outlook. First, US households still have some potential to take on more home-buying debt, but existing car and credit card debt should limit consumer spending. This is especially true if wages and salaries and thus disposable income do not increase significantly. Second, there are segments in consumer finance that are prone to shocks. Student and car loans in particular, but also possibly credit card debt, should be mentioned here.
http://www.fixed-income.org/ (Logo: © Sarasin)
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