WASHINGTON—While some analysts see warning signs in the amount of debt consumers have taken on, one economist believes that overall, American households have their borrowing and spending under control.
CUToday.info has reported that credit card debt and overall consumer debt may be reaching unmanageable levels, and that borrowers and lenders have forgotten the lessons learned from the Great Recession.
But Mike Schenk, CUNA vice president of economics and statistics, sees almost the opposite, saying that consumers are much more conservative with their borrowing than pre-recession, and that lenders—outside of those not regulated—are behaving well and that regulations are limiting them from making more, solid loans.
“Troubles ahead? That does not resonate with me,” said Schenk. “I look at things in the aggregate. And the aggregate metrics I see show that consumer debt is not only at manageable levels, but that debt payment burdens are basically near all-time lows.”
Federal Reserve Data
Citing the Federal Reserve consumer debt service ratio, which looks at mortgage and consumer debt as a percentage of take-home pay, Schenk noted the ratio is near its lowest levels since it the Fed began tracking it in the 1980s.
“There are a couple reasons for this,” said Schenk. “One, incomes are going up, more people are employed—we are nearing full employment. Two, interest rates are low and will likely remain fairly low for the foreseeable future. Higher cost mortgage debt is now more manageable, and monthly payments people are required to make, on all of their loans, are lower.”
Mike Schenk
Schenk said that the data also show the total amount of consumer monthly payments on outstanding debt obligations may be near an all-time low.
“The other way to look at it is the pile of outstanding debt relative to income at the moment is equal to 95% of take-home pay, economy wide, according to the Federal Reserve,” said Schenk. “You have to go back to about the third quarter of 2002 to see a debt-to-income ratio that low.”
Credit card debt, too, is not a concern to Schenk. Federal Reserve Q3 2016 data, he said, show that the overall consumer credit card debt-payment-to-income ratio is 5.54%.
“In 2007 it was 6%,” said Schenk. “Since then this figure has been on a declining trend until it bottomed out at 4.92% in the fourth quarter of 2012. It has been coming back up. But to go from 4.9% to 5.5% is not huge here.”
Schenk sees little to worry about in the fact loan growth, especially at credit unions, has been strong in recent years.
“The amount of debt people are taking on, in the aggregate and from a historical perspective, is not something I am especially worried about,” said Schenk.
But there certainly are people at risk, he acknowledged. Within those figures showing that overall U.S. household balance sheets are on solid footing are many individuals who are struggling, living paycheck-to-paycheck, saddled with a large amount of debt. Still, Schenck noted that while debt levels have been creeping back up post-recession, prior to the downturn the U.S. debt-to-income ratio stood at 125%.
“In the downturn the debt-to-income ratio fell dramatically,” pointed out Schenk. “And that had a lot to do with loans that were written off as people walked away from their obligations.”
Those defaults accounted for two-thirds of the decline in the debt-to-income ratio. One third, said Schenk, was covered by consumers getting their own balance sheets in better order, often paying down higher interest debt through refinancings.
Dramatic Turn
“It’s a pretty dramatic turn to go from 125% to 95%,” said Schenk. “But, on the other hand, if you asked most lenders they’d say they would like to make more loans than they are currently making, but all the regulations that have rolled out since the downturn have made it doubly difficult to engage with consumers. Getting a mortgage today is a lot more difficult and requires a lot more paperwork from a lender’s perspective.”
If there are issues with debt to be concerned about, according to Schenk, they stem from unregulated lenders making inappropriate loans, getting consumers in trouble.
“Overall, I don’t see any red flags when we look at debt in the aggregate,” concluded Schenk. “Consumers balance sheets, largely, are in fairly good shape. Plus, it’s not just that debt levels have come down—this is happening in combination with consumers’ financial assets appreciating. The value of the stock market has gone up over 20% in the last year, and is up even more substantially in the course of this latest economic cycle. Home prices have appreciated strongly, up about 6% in the last year and back to pre-recession valuation in the aggregate. Compared to historical records, things seem to be in pretty good shape.”