Credit-card debt, mortgage-debt ratio, and debt-service ratio are all very healthy, with student-loan debt one of the few problem areas.
By Manuel Gutierrez, Consulting Economist to NKBA
While the economic turmoil caused by the pandemic and subsequent economic shutdown continues to plague consumers and businesses, there has been improvement along many fronts. One of them is the debt situation of most consumers.
Figure 1 displays the growth in outstanding consumer debt, excluding mortgage debt. Total debt (the black line) was $4.28 trillion in May, the latest month for which the data are available, up 0.8% from the prior month. This translates into an annual pace of 9.98%, adjusted for seasonality.
Compared to debt levels from last May, however, the increase is a more manageable 3.7%.
Consumer debt had fallen modestly during the heavier months of the pandemic, between February and June 2020. The decline was just 2% over those four months, with debt falling to $4.125 trillion.
Credit-card debt in May is down over 10% vs. the year-ago period, reflecting a healthier economy.
The recent increases in debt since the beginning of last year are the result of consumers taking on more “non-revolving” debt — defined as debt that is paid back on a predetermined schedule, like home equity, mortgage or car loans — which reached slightly over $3.3 trillion in May (the red line). Non-revolving debt is up 0.8% for the month and a much higher 5.6% compared to May 2020. Many consumers use home-equity loans to finance home-improvement projects.
The good news is that consumers have been able to control, and reduce, their “revolving” (mostly credit card) debt. They have been paying their outstanding balances and have actually reduced the total to $975 billion. The last time the volume of debt was in this range was the middle of 2017.
A side benefit to consumers from the slower increases in debt is that their ability to pay the debt has improved.
Figure 2 displays the ratio of consumer debt payments to consumer income, the so-called “debt-service ratio.” The total consumer debt-service ratio, the blue line in the chart, is currently at 4.8% — near an all-time low. The last time the ratio was comparable was in the early 1990s, nearly 30 years ago.
Similarly, the mortgage-debt ratio has improved significantly over the last 10 years. Earlier this century the ratio hit a high of 7.2. This was at the peak of the housing boom that ended abruptly in 2008. The ratio rose rapidly at that time, when many consumers, who had purchased homes using sub-prime loans, found themselves unable to keep up with mortgage payments.
Among the major consumer-debt categories, excluding mortgage debt, is student debt, which continues to increase, reaching nearly $1.73 trillion in the first quarter of this year (Figure 3). Unlike mortgage debt, which is secured by the value of the home, student debt relies on the expected future earnings of students after graduation. A large number of them are realizing that their incomes are not sufficient to keep up with payments, much less reduce the debt.
The result is that the total amount of debt continues to increase, fed by interest payments that student debtors can’t afford.
While earlier in the 2000’s, credit-card debt was higher than auto debt, the relationship reversed six years ago. In fact, Figure 3 shows that consumers have been able to reduce their total credit-card debt over the last year. The $975 billion in debt outstanding in May is 10.3% lower than its level a year ago.
Charts:
