Flash Point: How Is the American Consumer Doing?

We received a link to a special report at Comstock Partners: The Deleveraging of the Two Most Outrageous Financial Manias in History. This prompted us to take another look at consumer debt. In Figure 1, we plotted (blue line) total household credit market debt (CMDEBT) – total household mortgage debt (HHMSDODNS) as a percentage of disposable income (TDSP). This represents all non-mortgage debt including credit card debt, student loans and other personal and car loans. It has tripled since 1980. Over the same period, however, the debt servicing cost as a percentage of disposable income has remained roughly constant in the 11-14% range (red line). This is thanks to the fall in interest rates shown in this picture by the Effective Fed Funds Rate (EFFR green line) as a proxy.

Figure 1. Household non-mortgage credit market debt and debt service cost as a percent of disposable income shown with the EFFR. (Click on image to open in a new window)

We suggest that with interest rates near their lower bounds, the consumer cannot take on more debt and maintain a constant level of debt service payment, something that he seems predisposed to maintain at this level.

The figure in the Comstock report, Household Debt Percent Of GDP, shows that the total household credit market debt is decreasing but this as we see above is entirely due to the decline in mortgage debt. The upturn in non-mortgage debt is troubling. We do not see that the consumer will be in a position to raise GDP significantly any time soon.

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