ONTARIO, Calif.—An economy that is humming along with a strengthening job market is a primary reason why one economist believes current consumer debt levels are manageable.
But if there are two areas in which borrowing has shown some small signs of trouble, it’s student loans and subprime auto, acknowledged Dwight Johnston, chief economist with the California and Nevada CU Leagues.
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.
Johnston, who while at WesCorp predicted the mortgage meltdown long before it happened, told CUToday.info that he doesn’t currently see any real warning signs in the economy or in the data around consumer borrowing.
“First of all, if the job market stays in good shape—with the way it’s going now with wages going up—people will be able to pay their debt back, as long as lenders are making sound lending decisions,” said Johnston. “And look at the credit union data–delinquencies and charge-offs are still near record lows.”
Watch Subprime Auto
Johnston said where debt levels and repayment issues may exist is within subprime auto lending. Within the last year some analysts have pointed to growing delinquencies in the subprime auto sector as a cause for concern.
Dwight Johnston
“But, again, for credit unions, they are not big players here—and really not the banks either,” noted Johnston. “The issues in subprime auto are really being driven by the subprime lending outfits.”
Examining Federal Reserve data, Johnston said the ratio of U.S. consumer debt payments to disposable income was 11.5% in 2000 and peaked in 2007 at 13.25%, a record high. Johnston said 8%-10% is the normal range.
“After the economy crashed debt was paid down by consumers and a lot was written off by lenders. That brought the number down to 9.7% in 2013,” explained Johnston. “Since then it has been at 9.85%. We have not seen any kind of startling rebound since the recession ended, which would be a sign of bad habits.”
From 2003-2016 non-mortgage-related consumer debt increased from $1.7 trillion to $3.2 trillion, according to Johnston.
“But $1 trillion of that is in student loans,” he said, who believes student debt is worthy of attention. “But these are long-term loans. And all of the other non-mortgage related-debt has gone up about a half trillion dollars in a 13-year period. That is not a dramatic rise at all.”
Over that same period, mortgage debt peaked at $13 trillion in 2008 and stood at $12.4 trillion through June of last year. “So we are still down on total mortgage debt,” he said.
Trouble If Economy Slips
What would concern Johnston, however, is if the economy began showing trouble signs.
“If the economy turns south and people lose jobs, well, any debt is too much debt,” said Johnston. “As long as the economy does well, the job market is fluid, and people are not taking ridiculous borrowing risks—as the data shows they are not—I have no concerns about debt levels.”
Even credit cards, cited by some analysts as an area where debt levels are becoming an issue, should be manageable, according to Johnston.
“For several years (during the recession) there was a paydown situation. And not until recently has there been much growth in credit card balances,” said Johnston. “When card balances have moved up they have moved up in a contained fashion. If in six to nine months I see big increases here, then I may be concerned.”