U.S. con­sumers amass record debt loads – and that’s cause for real worry

The Globe and Mail (Prairie Edition) - - OPINION - VINCE GOLLE

After delever­ag­ing in the af­ter­math of the last U.S. re­ces­sion, Amer­i­cans have once again taken on record debt loads that risk hold­ing back the world’s largest econ­omy.

House­hold debt out­stand­ing – ev­ery­thing from mort­gages to credit cards to car loans – reached $12.7-tril­lion (U.S.) in the first quar­ter, sur­pass­ing the pre­vi­ous peak in 2008 be­fore the ef­fects of the hous­ing mar­ket col­lapse took its toll, Fed­eral Re­serve Bank of New York data show. To put the bor­row­ing in per­spec­tive, it’s more than the size of China’s econ­omy, al­most four times that of Ger­many’s.

Peo­ple are bor­row­ing more not nec­es­sar­ily be­cause they’re con­fi­dent about their fi­nan­cial pros- pects. They’re do­ing it for ne­ces­si­ties such as ed­u­ca­tion or trans­porta­tion and, in many cases, just to get by.

On the sur­face, li­a­bil­i­ties at an all-time high aren’t alarm­ing when the as­sets side of the ledger is taken into ac­count. House­hold net worth stands at a record $94.8-tril­lion, thanks to re­bound­ing home val­ues and soar­ing stock port­fo­lios. But that in­crease has pri­mar­ily ben­e­fited the na­tion’s wealth­i­est, said Lance Roberts, chief in­vest­ment strate­gist at Clar­ity Fi­nan­cial LLC in Hous­ton and ed­i­tor of the Real In­vest­ment Ad­vice news­let­ter.

“When you look at net worth, it’s heav­ily skewed by the top 10 per cent,” Mr. Roberts said. “The av­er­age fam­ily of four is liv­ing pay­cheque to pay­cheque.”

For most Amer­i­cans, whose me­dian house­hold in­come is lower than it was at its peak in 1999, bor­row­ing has been the an­swer to main­tain­ing their stan­dard of liv­ing. The in­crease in debt helps ex­plain why the econ­omy’s main source of fuel is pro­vid­ing less of a boost than in the past. Per­sonal spend­ing growth has av­er­aged 2.4 per cent since the re­ces­sion ended in 2009, less than the 3 per cent of the pre­vi­ous ex­pan­sion and 4.3 per cent from 1982-90.

A look at worker pay presents a more dire back­drop for dis­cre­tionary spend­ing for those with­out a lot of as­sets. While the dif­fer­ence be­tween in­come from wages and house­hold debt has im­proved since the last re­ces­sion, it’s been lev­el­ling off and re­mains at a de­pressed level. The im­prove­ment also re­flects less mort­gage debt be­cause of in­creased home fore­clo­sures, rather than a pickup in earn­ings.

“This in­crease in lever­age has sapped our abil­ity to spend,” Mr. Roberts said. “I think we’re stuck.”

Stocks may be at record highs but plenty of house­holds aren’t par­tic­i­pat­ing, ac­cord­ing to a re­cent Gallup sur­vey.

Tap­ping home eq­uity via lines of credit, which pro­vided more funds for spend­ing in the years for the last down­turn, is less of an op­tion now as well. That’s be­cause home own­er­ship rates are hov­er­ing close to the low­est level since the 1960s and more peo­ple rent.

De­mo­graph­ics are also play­ing a role. Mil­len­ni­als, those born in the early 1980s through the late 1990s, are now the big­gest liv­ing gen­er­a­tion in the United States. They’re also more likely to be sad­dled with stu­dent debt. The New York Fed’s lat­est quar­terly re­port on house­hold bor­row­ing and credit shows strains are de­vel­op­ing as 11 per cent of ed­u­ca­tional debt was ei­ther 90-plus days delin­quent or in de­fault in the first quar­ter.

Car sales, while re­cently show­ing signs of rolling over, have been an eco­nomic main­stay over the past sev­eral years. But for all those cars rolling off dealer lots, more Amer­i­cans have car pay­ments. Mo­tor-ve­hi­cle-loan li­a­bil­i­ties are at an all-time high.

Credit-card de­fault rates also show some very early signs of stress de­vel­op­ing, though they, too, are very mod­est.

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