Consumer Debt Outlook - May 2018

Highlights

  • Despite a recent pause in credit card balance increases, Americans are on pace to amass a collective $4 trillion in consumer debt by the end of 2018, according to a LendingTree analysis of the latest Federal Reserve data. Consumer debt includes non-mortgage debts such as credit cards, personal loans, auto loans, and student loans.
  • Collectively, Americans owe more than 26% of their income on consumer debt, up from 22% in 2010.
  • Unlike the previous decade, housing-related borrowing has barely budged, growing at about a 2% annual rate over the past five years. Meanwhile, other types of borrowing increased more than 38% over the same period.
  • Credit card delinquency rates remain relatively low at 2.4%, and consumers anticipate a record low likelihood that they’ll miss a loan payment in the next three months.
  • Since the end of deleveraging in 2013, the consumer has been responsible for 80% of the growth in Gross Domestic Product.

Incomes growing, but consumer borrowing growing faster

Since 2013, Americans have been accumulating more debt. Overall, the percentage of total non-housing debt, at 26% of Disposable Personal Income, is now even higher than during the credit boom in the mid-2000s.

However, the primary difference in the past few years is how Americans borrow. When comparing the growth in mortgage-related debt to other types of debt (like credit card debt and auto loans), the latter is growing at more than 7% annually, while housing-related debt has grown at an annual rate of a little more than 2%. Growth in consumer debt can cause greater strain on personal finances; it enables spending on consumables and depreciating assets like cars, rather than traditionally appreciating assets like a home.

Temporary dip in credit card debt

Overall, the amount American consumers owe on revolving credit (primarily credit card) and non-revolving credit (like auto loans and student loans) fell by $2.9 billion in March – a less than 0.1% drop to $3.824 trillion. Revolving credit, primarily credit card spending, actually fell by $8.1 billion to $976.6 billion, the second consecutive month of declining balances.

But based on the longer term trend, we expect consumers will owe more than $4 trillion on these types of credit, possibly as soon as this calendar year. For nearly two years, consumer credit has grown at a steady rate of 5 to 6 percent annually. Even if borrowing levels increase at the low end of that range, we expect the total amount owed will exceed $4 trillion by the end of 2018.

Credit card borrowing remains sustainable

Credit card delinquency rates remain relatively low, despite recent reports of increases in charge-offs at some credit card issuers.

According to recent Federal Reserve’s Survey of Consumer Expectations, consumers appear to feel relatively comfortable with servicing their debts. On average, consumers reported that they expected there was only a 10.72 percent chance that they would miss a loan payment in the next three months – the lowest reading since the survey began in 2013.

The consumer is leading the way, again

When the Commerce Department delivers the Gross Domestic Product report every quarter, you’ll often read that the consumer represents two-thirds of the total economy, or that the consumer is growing the economy.

While personal consumption has always represented the lion’s share of GDP, it’s even more so in the current economic expansion. Personal consumption now exceeds two-thirds of GDP, higher than in any period since the end of World War II.

And since the end of deleveraging, when consumers reversed their borrowing habits following the housing bust, personal consumption represents nearly 80 percent of the total change in GDP.