When will rising consumer debt start holding back economic growth?
As consumer debt levels reach records, answering this question should be a priority for US policymakers if they want to stimulate the economy.
According to the latest Quarterly Report on Household Debt and Credit released today by the New York Fed’s Center for Microeconomic Data, total household debt increased by $116 billion to reach $12.96 trillion in the third quarter of 2017.
This headline figure camouflages problems emerging at the bottom of the market. Indeed, according to the report, the outstanding subprime auto debt now stands at about $300 billion. This amount has increased steadily in absolute terms but remained constant at 24% of the total outstanding auto loan balance since about 2011. There are over 23 million consumers who hold subprime auto loans. Around 10% of borrowers with scores of 620 or less are 90+ days delinquent, around the same level as reported in 2008/2009.
Rising Consumer Debt: Not A Problem, Yet…….
According to a report from credit rating agency Moody’s, the US auto market plateaued in 2016 at 17.4 million units. Over the next few years, as leases runoff, the second-hand market will be swamped with oversupply. Maturing leases are forecast to reach 3.6 million this year — the highest on record — and continue to grow to 4.3 million by 2019. This excess supply will “pressure used car values for the foreseeable future” further denting consumers’ ability to repay loans, and issuers ability to recover the full outstanding amount.
Still Moody’s isn’t overly concerned about the risks the creaking auto finance pose to the rest of the US financial system. The agency notes that as a percentage of total post-financial-crisis auto lending, subprime “hovers around 20%, down from approximately 25% before the crisis.” What’s more, of the approximately “$1.1 trillion in outstanding auto loans, 14% are financed through securitization. That is less than the approximately 20% funded through the asset-backed market before the financial crisis.” So, considering the situation as it is today, there’s no reason to panic. However, Moody’s does warn that this could be just the start of a much more significant trend, one which would almost certainly be a drag on the whole financial sector.
