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US Household Debt as % of Disposable Income is currently 'Unrecessionary'?

US Consumer spending is the biggest single spending factor accounting for about 65% of total US GDP while business and government roughly split the remaining 35%. Most economists therefore argue that consumer spending is what drives the US economy. Over the last two years we've seen record and near-record retail sales and consumer optimism. That makes sense with full employment and a rising stock market.


While the press seems infatuated with talking about 'recession indicators', one fundamental factor not being discussed is the relative strength of the credit situation of US Households. US Household Debt has been rising, but as a percentage of Disposable Household Income (DPI), it has in fact fallen and remains near historic lows. From this perspective, the US consumer is in great shape.


US Household Debt Service Payments as a $ of Disposable Personal Income

Certainly, no single factor can describe all US Households or the relative strength or weakness of the US economy, but we're hearing people talk about a recession when the US Consumer may have never been in better shape, at least from a credit/debt perspective. Current consumer spending is strong and it is rare to see a drop in consumer spending prior to an increase in their debt ratio.


In fact, given the low rate of unemployment, rising wages, a near record-high stock market, and historically low interest rates, there could in fact be demand building for increased consumer spending as consumers have the balance sheet to take on more debt.


If we look at the components of Household Debt we can see that Mortgage Debt is back near the 2007 peak, yet Mortgage Debt as a percentage of DPI is back to where it was in the early to mid 1980s as seen in the chart below. The peaks in Mortgage Debt as a percentage of DPI in fact coincide with recessions in the early 1990s and starting in 2007.

US Household Mortgage Debt as a % of DPI

There are more components to household debt, credit cards, auto loans and student loans. Looking at these three components, Student Loan Debt has grown significantly, but Credit Card Debt has been relatively flat over the last 15 years and Auto Loan Debt has also risen more slowly. Given the much larger role Mortgage Debt plays in perspective to the other three types of debt it has offset credit stress that might have otherwise been created. Also, wages have been rising over the period making these ratios of debt to income increasingly more manageable.


Househld Debt Components

Where this increase in Student Loan Debt clearly can make a difference is with Millennials as they approach home purchases as part of the Life Cycle of Spending and Investing. While a home is arguably an asset, student debt really isn't although it might be considered a cost for obtaining a future (higher) income and currently it is likely a negative factor in home purchases for this group.


Since the end of the Great Recession in 2009, the Personal Savings Rate has also risen significantly. After reaching a historic low in late 2005 and remaining in that range for a couple of years it has rebounded significantly and approaches levels we have not seen in decades. This should give households an increased cash cushion and the ability to take on more debt if they desire.

US Personal Savings Rate

Overall, US Households are in good shape when it comes to debt service as a percentage of disposable income, nothing like levels we've seen that might be recession inducing, and more likely at levels that could sustain or even increase economic growth. While some want to discuss technical indicators of a potential recession, we don't see any fundamental case for one based on the US Consumer, in fact, if anything, we see the potential for increased spending and growth.

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