“Risky US consumer credit dynamics?”

The key chart

The key message

What are the implications of buoyant US consumer credit flows for the state of household balance sheets?

Consumer credit is the second largest financial liability for US households (24% total) after mortgages (64% total). This structure has changed little over the past 20 years, although the relative importance of mortgages (up then down) and consumer credit (down then up) fluctuated in the interim period.

Consumer credit displays a relatively stable relationship with disposable personal income (DPI). The recent moderation in monthly credit flows is consistent with the consumer credit to DPI ratio being at high end of its narrow, historic range (at the end of 3Q22).

Mortgage debt, in contrast, displays a more volatile relationship with DPI. Importantly, the deleveraging of the US HH sector in the post-GFC period is due almost exclusively to a reduction in excess mortgage indebtedness. Consumer credit indebtedness is largely unchanged.

Two key messages here:

1. It is reasonable to assume that the demand for consumer credit will continue to moderate, putting pressure on consumption in the process
2. Overall HH sector risks associated with the level of indebtedness and affordability of debt remain more manageable than in the pre-GFC period

Recall that the US led advanced economies in the structural shift away from relatively high-risk HH debt towards relatively low-risk public debt in the post-GFC period.

More elevated HH debt risks can be found elsewhere…

Risky US consumer credit dynamics?

In my previous post, I noted that US consumers were doing their level best to counter the “US slowdown” narrative. While consumer credit demand has moderated from its recent highs, monthly flows in November 2022 were still almost double their pre-pandemic average flow. In response, I was asked what this means for the state of consumer balance sheets. This post provides a summary response.

How important is consumer credit?

Consumer credit is the second largest financial liability for US households (24% total), after mortgage debt (64% total). The structure of financial liabilities has changed little over the past 20 years, although there has been important variations in the relative importance of mortgages (up then down) and consumer credit (down then up) during the interim period (see charts above and below).

What is the relationship with disposable personal income?

Consumer credit has also displayed a relative stable relationship with disposable personal income (DPI) over this period. The recent moderation in demand is consistent with the fact that the ratio was close to the upper end of its historic range at the end of 3Q22 (see chart above).

Mortgage demand, in contrast, has displayed a more volatile relationship with DPI over the period (see chart above). Indeed, the deleveraging of the HH sector in the post-GFC period is due almost exclusively to a reduction in mortgage indebtedness (see chart below). Consumer credit indebtedness is largely unchanged since the GFC.

Conclusion

Two key messages here:

1. It is reasonable to assume that the demand for consumer credit will continue to moderate, putting pressure on consumption in the process
2. Overall HH sector risks associated with the level of indebtedness and affordability of debt remain more manageable than in the pre-GFC period

Recall that the US led advanced economies in the structural shift away from relatively high-risk HH debt towards relatively low-risk public debt in the post-GFC period.

More elevated HH debt risks can be found elsewhere…

Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.