Americans Seen "Flirting With Financial Disaster" As 2Q Credit Card Debt Soars Back To 2008 Highs

With credit card data in for Q2 2017, American households look to once again be on a collision course with the ever-elusive $1 trillion goal that narrowly escaped their clutches in 2008.  With nearly $940 billion in credit card debt outstanding, 2Q 2017 marked the second highest consumer revolving debt balance since the previous peak in 2008.  Per WalletHub:


All of which adds up to nearly $8,000 of credit card debt per household, up 5% YoY versus flat-ish wages.


Of course, the more surprising component of the 2Q 2017 credit card data is not that banks continue to trip over one another for the 'opportunity' to underwrite Americans' purchases of fidget spinners, but rather that they continue to do so despite the rather ominous recent rise in charge-offs.

Credit card

Not surprisingly, Morgan Stanley recently noted the same trend in subprime credit card delinquencies...which they apparently found staggering in light of the fact that 'everything is awesome' in the job market.

Of course, after spending the entire month of August analyzing those seemingly contradictory facts, Morgan Stanley came to many of the same conclusions that we note a regular, recurring basis.  Apparently, soaring credit card delinquencies have something to do with stagnant wages in the face of soaring healthcare costs and rising rents...who could have guessed that?

Investors ask, "Why are card losses rising if employment is  so good?" Our deep dive & quant work shows subprime is stretched from higher rent, healthcare costs & low  wage growth, with lower credit availability a coming drag.


A Tale of Two Consumers, with the subprime consumer increasingly at risk, driving up net charge-offs (NCO) and lowering EPS: The economy is solid and unemployment is very low, but credit card delinquencies have been increasing... so we spent the month of August delving into what is really  going on with the US consumer.   We found that the average consumer is in good shape but the financial pressures on subprime consumers are high and, critically, rising


1. Banks are  pulling back on subprime card loan growth. For the past 3 years, bank lending to subprime card posted an 8% CAGR, faster than prime's 5% growth.   But banks are now beginning to put on the brakes.  Subprime loan growth has slowed over the past two quarters to 10% y/y in 2Q17, down from 13% y/y peak in 4Q16.    Our quant work shows a negative correlation between change in loan growth and change in losses.  Result? Expect declining subprime loan growth to drive up subprime losses over the next 12 months. 


2. Rent and healthcare costs a bigger burden for lower income consumers… and rising.  Consumers in the lowest income quintile spend 38% of after-tax income on rent and another 18% on healthcare costs, a combined 56%.  This is well above the average consumer's  40%.  Pressures are building on both.  Our REIT colleagues expect rental rates on mid- to low income apartments, Classes B & C,  will continue to rise from already high levels, but at a decelerating pace.  Our healthcare colleagues expect healthcare costs to rise ~5% annually over the next few years.   These costs put more pressure on lower income consumers, who have lower wage growth.


3. Discretionary income not keeping up with debt service burden growth.  Debt service burden (interest and principal repayment) is growing 2%, faster than the 1% growth in discretionary income for the average consumer. That means, after paying for basic needs like  shelter, food, healthcare, and utilities, there is less left over to pay back lenders. Middle income renters are in the toughest spot as  it looks like their borrowing has accelerated in auto, student, and personal loans, while their  disposable income growth has been below average.  The lowest income quintile is burdened by high and rising rent and healthcare costs.

Ironically, after declining for decades, Morgan Stanley presents the following chart which reveals that healthcare costs as a percent of disposable income started consistently rising again only after the passage of Obamacare.  Meanwhile, soaring apartment rents are also wreaking havoc on disposable income for middle-class families.

Meanwhile, despite a "strong job market", debt payments can only continue to grow at a faster rate than income for so long before it starts to take a toll on overall credit performance.

Alas, all things that Yellen & Co. can cure with some more rate hikes...


Automatic Choke Giant Meteor Mon, 09/11/2017 - 21:04 Permalink

that's me.   southwest cc, i use it for everything, both personal and work.  accumulate huge mileage count, pay in full every month, and never pay for a plane flight.i LOVE being a deadbeat.  (edit:    I love those cute names that officials/experts give us.   my favorite was, as a sea kayaker, hearing that sea kayaks are known to the coast guard as "debris"...... flotsam without a bearing.   nice comforting sound, being debris.) 

In reply to by Giant Meteor

slwsnowman40 Bigly Mon, 09/11/2017 - 22:06 Permalink

When I was making about $34,000 a year I had received a credit increase to $10,000.  At the time a serious brainstorm errupted as I realized how upside down I was living and have been making cut backs ever since and that was only a third of my salary before taxes.  Also, it became clear to me the bank wouldn't say no when it came to me requesting more money (ironically, they did tell me no - to $500increase, just to send me the aforementioned increase), then it dawned on me there was no max credit limit I could have.  And that scared me. I can't fathom having a card with $34,000 limit.  That just seems so stupid and might have me shit bricks.

In reply to by Bigly

Pernicious Gol… Bigly Tue, 09/12/2017 - 01:34 Permalink

Companies pay attention to your aggregate debt limit in relation to your income. If you have a lot of credit outstanding you won't be able to take out new cards. Southwest gave you a high limit because you didn't have much credit outstanding relative to your income; they hope to prevent you from getting credit cards from other companies. That way you're more likely to use theirs.

In reply to by Bigly

Crawdaddy Mon, 09/11/2017 - 19:37 Permalink

Get a Hopium Platinum and all is good. Use it to catch up ya 7yr car loan. And ya 36 month wheel loan. And ya renta-center big skreen. 16 new economy jobs were created by the creation of this comment. You're welcome. Mon, 09/11/2017 - 19:44 Permalink

The magic inflation calculator ball says about 15%.So the real number is only 799 billion. hehehe...."only"That's only $2,500.00 for every man, woman and child.Of course, don't forget about the broke country, broke county, and broke cities.  

Silver Savior Mon, 09/11/2017 - 19:53 Permalink

I have no debt and bad credit. I am happy about that. Doing better than someone with a top credit score and a little debt. Think about it. Why go in debt for anything and make it cost a lot more through theft ( compound interest ).? 

Gobble D. Goop Mon, 09/11/2017 - 19:51 Permalink

Al Gore to his research team:  Folks, I need ten talking points tying soaring credit card debt to Anthropogenic Global Warming.  Have the graphics team throw me some charts together correlating the cumulative debt to temperature curve.SELL! SELL! SELL!

Money Mantra (not verified) Mon, 09/11/2017 - 19:56 Permalink

Credit card debt has already already been killing finances in UK. It is coming to you soon. I think SHEPWAVE analysts know this is happening soon and I they have already begun hedging with  bearishpositions. At least that's what is going around.

user_name Mon, 09/11/2017 - 19:57 Permalink

Wages not increasing to keep up with costs of important things like new car downpayments and iPhones.  Meh, just put it on the card and worry about it later.

Manipuflation Mon, 09/11/2017 - 20:18 Permalink

I only recently started using my credit cards just to use them once in while for small purchases to show activity.  Buy a tank of gas, pay it off, and no problem.  The credit issuer's computer program thinks you still care.