US debt service ratios

If you look at debt service ratios from 2008 to date you would be led to believe that consumer indebtedness has improved markedly.  In fact you would believe that conditions are the best they have been since at least the early 1980s.  But if you broaden your perspective you find that conditions today have not strayed too much from those conditions which have been in place for much of the last 14 years. 

According to the available data are at lowest levels since at least the early 1980s…

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But this may not be the whole picture.  We know that since at least the start of the current recession that current transfer receipts have provided some 3% + of national income:

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Adjusted for this, debt service ratios are moderately adjusted:

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But we also know that debt service ratios are met from disposable income, so how much income is growing is also important….

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So if we deduct the annual per capita growth rate of current income (note different from the above chart which is real and smoothed) from debt service ratios (yes it is arguably a crude adjustment but it has merit) we arrive at a different and more representative figure:

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Debt servicing is paid out of current income, so the more your income is growing the easier it is to pay for it.  But, debt service ratios also need to be viewed in terms of the overall leeway for increasing expenditure:

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So let us compare debt service ratios adjusted for income relative to the disposable personal income remaining after personal consumption expenditure.  So during the 80s while interest rates were higher, debt levels were lower and leeway for increasing consumption was indeed higher…debt service ratios were only one component of the personal consumption expenditure picture..

So what leeway do US consumers have to make additional expenditure? 

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Not much….a 4% savings rate is pretty low.  And we must also not forget that the DSR paradigm of today is different from much of that leading up to 2007:

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Household debt has indeed fallen but based on one dynamic (the peak of the increase) it is only back to levels that were more or less associated with the peak of credit growth, a peak which was ultimately shown to be highly unstable.   We either have low IRs and low income growth and low savings and low financial leeway or we have increasing IRs and potential instability.  Low DSRatios do not exist within a supportive dynamic…Their singular relevance diminishes in the whole.

If you look at the above charts, you find that after adjusting for lower income growth and high government transfers, the decline in debt and lower interest rates have only brought about an equalisation of negatives.  Actual dynamics from 2001 to date are more or less linearly comparable…there is no real improvement.    You could say consumers are being kept afloat by low interest rates. And, because we are lost in the averages, and income distributions have become increasingly skewed, we do not really know the impact on the individual economic unit.   Leeway for the majority may well be worse than that shown.

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