US Consumer Debt: The Next Financial Crisis?
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US Consumer Debt: The Next Financial Crisis?

Some commentators have suggested that we may be heading towards a consumer debt-induced financial crisis in the US reminiscent of 2008. However, our analysis shows that the risk of a new financial crisis triggered by high levels of US household debt is lower today than it was in the period before the financial crisis.

The best way to think about consumer debt for any economy is to look at the total level of household debt relative to the size of the economy. For the US consumer we can look at US household debt as a percentage of the US economy (US household debt-to-GDP ratio). This gives you a better picture of how indebted US consumers are relative to the capacity of the economy to service that debt.

When we look at US household debt-to-GDP (%) over time, we see the level has declined substantially since 2008. This has been driven by strong US economic growth, and importantly, that the growth rate of the US economy has been higher than growth in household debt. A strong economy can support a rise in consumer debt as the high growth rate in economic output can more than cover the cost of servicing that debt.

Higher interest rates in the US will make servicing debt more expensive for any debt holders paying variable interest rates on their loans and for consumers taking out new loans. However, so long as the US economy continues to grow at a strong pace and grow faster than the growth rate in household debt (this has been the trend for the past 10 years), then the household debt-to-GDP ratio will continue to decline. A lower household debt-to-GDP ratio indicates lower risk of a consumer debt crisis, and vice versa. The chart below shows the US household debt-to-GDP ratio (%) in the 2008-2018 period, declining from 99% in 2008 to 77% today.

graph 05 debt0

             Source: tradingeconomics.com, Bank for International Settlements

The following chart shows the same ratio of US household debt-to-GDP for the period 1950-2018. You can clearly see the ramp up in levels of household debt relative to GDP in the period preceding the financial crisis, peaking at more than 99% in 2007-2008. This would have been a strong indicator at the time that the risk of a debt-induced economic crisis was rising. Higher debt-to-GDP ratios indicate higher levels of risk of a debt crisis. Falling ratios indicate a lower risk. Since 2008 you can see the rate of economic growth in the US has exceeded growth in US household debt and so the household debt-to-GDP ratio has declined. The current level of US household debt-to-GDP is equivalent to the levels seen in 2002-2003, not a period considered to represent a high-risk of a consumer debt driven crisis. These data indicate the US consumer has not over leveraged and in-fact has reduced leverage levels since the financial crisis.

graph 05 debt1

             Source: tradingeconomics.com, Bank for International Settlements

The table below puts the current level of US household debt-to-GDP (%) in the context of other major economies. There are many other major economies with higher levels of household debt-to-GDP than the United States, many of those countries with levels far exceeding the US level. The most recent data shows the current US ratio at 77.3%. The most recent data for Canada is a ratio of 99.4%, while Australia is more than 120%. On this measure, compared to many other developed economies, the US consumer has relatively lower levels of debt and arguably, given that US economic growth is stronger than most other countries on this list, the US consumer is in better shape to adapt to higher interest rates than consumers in other major developed economies. Also, worth noting here is that the US consumer savings rate has increased since the financial crisis. It declined steadily through the 1990s and up until the 2008 crash. Since 2008 US consumers have increased savings rates back to levels last seen in the 1990s and well above the levels in the decade preceding the 2008 crash.

graph 05 debt2

   Source: tradingeconomics.com, Bank for International Settlements

MBS for Consumer Debt

In the US, credit card debt and auto loans make up the majority of non-housing household debt and these loans are often securitized into asset-backed securities. The majority of household debt is housing debt (mortgages), currently 70% of the total. Non-housing debt represents 30% of the total, posing much less of a systematic risk than housing related debt. There is always the risk of a repeat of asset-backed securities like MBS defaulting because of mis-pricing, as we saw in 2008. We could see something similar in credit-card debt or auto loans. However, in the lead up to that crisis the US consumer had much higher levels of debt and much lower savings rates, making them much more vulnerable to default. Today the US economy is much larger than it was in 2008, household debt levels are much lower relative to GDP and savings rates are higher. This would indicate the risk of a consumer debt-induced crisis like 2008 is much lower today.


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