With all the attention going to political tensions between the USA and North Korea and the interest rate policies and monetary policies established by the various central banks around the world, we would almost forget to keep track of how the ‘real’ economy is doing. And then we aren’t talking about GDP results or theoretical consumer confidence levels, but about how the average households in the United States are doing with a special attention to the debt levels.
Because consuming goods is one thing. Being able to afford them is another thing and if your consumption pattern and consumption economy is based on quicksand, then one simple economic shock might cause the entire consumption-based economy to collapse.
The Federal Reserve Bank of New York has provided an updated net household debt situation, and the chart looks pretty alarming. After the Global Financial Crisis has hit the USA, the total debt decreased from 12.7 trillion dollar to 11.3 trillion dollar by 2013. Whilst this seems like a marginal move fueled by lower mortgage debt, it’s actually pretty impressive considering the 125 million households in the USA reduced their net debt by $11,200 per household.
Source: NY Fed
However, since 2013, the fears for another financial crisis have decreased as the US banks seemed to be fine as most were passing the stress test of the Federal Reserve with flying colors. Meanwhile, the focus of the crisis and monetary world shifted towards Europe where Greece, Italy and Spain were trying to get their public finances in order.
As the consumer confidence levels increased, so did the total amount of household debt and on the previous image you can definitely see the ‘non-housing debt’ is increasing at a faster pace than the mortgage-related debt. Indeed, in the past five years, the non-housing debt level increased from $2.75T to $3.7T and to make things worse, credit card debt is becoming a real issue now. Not only did households start to buy more goods on credit, they bought it on ‘expensive’ credit which could create a vicious circle and an avalanche of ever-increasing debt.
Source: St Louis Fed
Should the delinquency rate accelerate, banks might be forced to report additional write-offs on their credit card balances. Looking at the results of the eight largest credit card issuers in the second quarter, this is already happening. All eight of them saw the losses related to credit cards increase.
Source: Discover Financial Services Q2 presentation
As you can see on the previous image, the Net Charge Off ratios are increasing as Discover Financial, and the same situation occurs at all other large credit card companies. The world has been focusing on government debt, but doesn’t seem to realize household debt could potentially be even more dangerous as an economic shock could crush the demand side of the economy.