US Household Debt Is Rising 60% Faster Than Wages, And One Rating Agency Is Worried

In a report released today by DBRS titled "Consumer debt and debt burden", the rating agency which is best known for keep Italian debt eligible for ECB monetization at the peak of the European banking crisis, looks at the latest Quarterly Report on Household Debt and Credit issued by the NY Fed (discussed here previously) which showed that consumer debt for the third quarter of 2017 was approximately $12.96 trillion, representing an increase of $116 billion over the second quarter of 2017. The debt level for the first three quarters of 2017 has continued to increase above the previous record debt level which was established in the third quarter of 2008 as shown in Exhibit 1 below.

DBRS also highlights that not only did total debt levels increase, but their composition changed as highlighted in Exhibit 2 below.

The good news: total mortgage debt has decreased since 2008, to $8.743 trillion from $9.29 trillion, but as of the third quarter of 2017, still accounts for 67.5% of overall consumer debt.

The bad news: since 2008, the growth in total debt has been attributable to the auto loan and student loan sectors. Auto loan debt has increased by 50% since 2008, to slightly over $1.2 trillion from approximately $800 billion. The most dramatic growth rate, as Zero Hedge readers know well, has been in student loan debt which has grown by 122% since 2008, to $1.357 trillion from $611 billion.

But a bigger concern flagged by DBRS is that the growth in consumer debt is raising concerns when viewed in the context of the existing wage stagnation hampering the current economic environment. The rating agency cites a paper published in October 2017 by the Harvard Business Review which stated that the inflation-adjusted hourly wage has grown by only 0.2% per year since the mid-1970s and labor’s share of income has decreased to its current level of 57% from 65%.

Meanwhile, in the second quarter of 2017, wages were only 5.7% higher than they were a decade earlier. In comparison, the Federal Reserve Bank of New York/Equifax data shows that consumer debt growth over the same period was 9.3%.

In other words, the purchasing power of US households has been largely a function of rapidly rising debt, which over the past decade has risen 60% faster than wages.

There is another concern: while overall delinquency rates have stabilized in recent years, the one stubborn outlier remains student debt, where 90+ day delinquencies have risen to more than 10%.

This is a problem because as Bloomberg's Lisa Abramowicz writes, considering that GOP tax overhaul may eliminate tax deductions on interest on student loans, this debt load could become even more onerous.

It's not all bad news, however: as DBRS concedes, stabilizing delinquency trends imply that a tipping point has not yet been reached. There is also the suggestion that since there have been significant economic booms since the 1970s, during periods of persistent wage stagnation, the tolerance level for gaps in debt and earning power is quite large.

On the other hand, the rating agency also concedes that with consumer debt at all-time highs, and rising, as the debt/wage relationship seems to be entering a previously unobserved phase, "it seems prudent to closely monitor both components."  This is a "red flag" for the economy because as Abramowicz concludes, "should unemployment rates rise at some point, this balance could fall out of whack, exacerbating any economic downturn."

Of course, a variant perception on this threat is that once the economic fundamentals catch up with reality, and the US consumer is tapped out in a rising rate environment and crushed by the weight of $1.4 trillion in student loans, the Fed will promptly halt the current monetary tightening regime, and revert back to preserving the "wealth effect" with more ZIRP, QE and eventually NIRP. One look at the S&P confirms just how "worried" the market is about the current state of the economy...