Delinquency rates can offer a silver lining

Yogi Berra said, “It’s tough to make predictions — especially about the future.” But, we never hesitate to try. The economy and, more important, its resulting stock prices are the issues commanding endless speculation. It’s a preoccupation fueled by endless hope.

So the Institute of Trend Research weighed in recently with an analysis of consumer debt, which can be a forward indicator of sorts.

Not long ago, pundits were bemoaning the fact that consumer debt was at an alltime high and threatened to derail the economy. Consumer spending makes up 60 to 70 percent of our entire economy, so this economic component is an important engine driving jobs and growth.

The reason for being vague about the percentage is that it is not always just a measure of goods and services. In some circles, the percentage also includes health care (one-fifth of the economy in and of itself), which means insurance companies and the government are actually contributing to the spending — not solely out-of-pocket consumer expenditures. Whatever. It’s still a big chunk of our economy.

But back to the debt level. It stands to reason that a growing pile of consumer debt owed on cars, college tuition fees, credit cards, etc., will stand in the way of further spending.

However, a more telling statistic for anyone looking for a silver lining is the rate of delinquencies on all that debt.

While consumer loans totaled more than $1 trillion, the delinquency rates are well below the 10-year average. That average is 4 percent, and today’s rate is roughly half that number.

Student debt is another issue in that the delinquency rate is 11.2 percent, but the good thing is that it has remained stable for the past five years. Compared to a 10-year average of 9.2 percent, the rate is high but stable — possibly a reflection of the improved job statistics coupled with the value of a college education.

Also, any comparison with history is complicated by the fact that interest on debt today costs a fraction of what lenders charged prior to previous downturns in the economy. Historically, the installment interest paid on debt amounted to about as much as the debt itself.

The total interest I paid on my $3,000 first car in 1969 was $1,900 over just three years — a rate of about 20 percent. Compare that to today’s advertisements trumpeting 4 percent or less. With these record-low interest rates, historical comparisons may not apply, meaning simply that consumer debt no longer promises to be the straw that breaks the camel’s back.

Record-low interest rates are largely a product of conservative investors and company managers cautious about what lies ahead, after having been severely burned in the 2007-2008 financial collapse. With people content to hoard money in cash that earns nothing, there is no incentive for institutions borrowing short term to have to pay higher interest to induce savers to lend them money.

For longer terms, like 10 years, what affects interest rates is the extent to which investors expect higher inflation. The interest rate on a 10-year loan needs to be high enough to offset what investors collectively feel will be the rate of inflation over that time. Currently, these investors are placated by interest levels in the 2-3 percent range.

So what this all says is that interest rates aren’t about to spike anytime soon, and until they do, consumer debt is not the economic bugaboo that caused much concern in the past.

Steve Butler is the CEO and founder of Pension Dynamics Company LLC. To read past columns and learn more about his book, visit www. pensiondynamics.com and click on resources. Steve can be reached at 925-956-0505 ext. 228 or sbutler@pensiondynamics.com.