The key chart
Trends in US private sector debt ratio (% GDP, RHS) and relative growth versus nominal GDP (3Y CAGR %, LHS) (Source: BIS; CMMP)
The key message
Whisper it softly, but the level of US private sector INDEBTEDNESS is largely unchanged over the past TWO DECADES.
According to the latest BIS data release, the private sector debt ratio was 150% GDP at the end of 2Q23, down from its all-time peak of 170% GDP (3Q08) and its recent “pandemic-peak” of 162% GDP (4Q20). For reference, the debt ratio was 149% GDP at the end of 2Q03 (see key chart above).
The absolute level of debt reached a new high ($39.9tr) in 2Q23, however, re-enforcing the difference between the level of debt and the level of indebtedness. A key distinction that is often overlooked in popular, but flawed, US debt narratives.
Over the past three years, private sector debt has grown at a CAGR of 5.6%. Nominal GDP has grown at a CAGR of 7.6% over the same period. This negative “relative growth factor” is illustrated when the blue shaded area in the key chart above falls below the x-axis.
Note that over the past two decades, private sector debt has fallen from 73% of total US debt to 60% of total US debt. Lower-risk, government debt substituted for higher-risk household debt as the private sector embarked on a period of passive deleveraging post-GFC. The US led the advanced world in this important development.
The household debt ratio has fallen from its 1Q08 peak of 98% GDP to 74% GDP at the end of 2Q23. The corporate sector debt ratio has fallen from its 1Q21 peak of 84% GDP to 77% GDP at the end of 2Q23.
So what?
The US is one of only three advanced economies that has both household and corporate debt ratios BELOW the BIS threshold limits above which debt becomes a constraint on future growth. How often is this part of US debt narratives?
Viewed in this context, and recognising the distinction between the level of debt and the level of indebtedness, the resilience of US consumption and growth in the face of unprecedented monetary tightening becomes less surprising…
Please note that the summary comments and chart above are abstracts from more detailed analysis that is available separately.