May 16, 2017
- U.S. household finances are in stronger shape than is often perceived
- Conference Board Consumer Confidence hit a 16-year high in March
- Relatively low debt burdens give consumers financial flexibility and offers support to the economic outlook
U.S. economic activity has been growing at a sound pace over recent quarters. There is also evidence that economic activity may be gaining momentum both domestically and abroad. Clearly, this is good news. But, what may be even better news is information that often flies under the radar: U.S. consumers are in good financial shape and their confidence is rising.
According to the Conference Board, which surveys consumer attitudes about current economic conditions, the Consumer Confidence Index for March 2017 reached its highest level since the December 2000. Even after a modest decline in April, a spokesperson for the Conference Board says consumer confidence “still remains at strong levels.”
Debt is rising but well managed
Sure, we all know someone who has too much debt, is not saving properly for retirement, or is just scraping by. Such segments of the population always have, and always will, exist. In aggregate, however, consumer finances are possibly in their best position in decades.
- Debt levels in comparison to incomes are the lowest they’ve been since the early 1980s
- Consumer credit scores, according to the credit rating agency, FICO, are at the upper end of their historical range
- Delinquency rates on consumer loans are near their lowest levels in decades
It’s more common, however, to see stories trumpeting headlines such as “Consumer debt hitting new all-time highs.” These stories are correct. The total dollar value of consumer debt is currently at an all-time high. This is almost always the case. In the 73 years since the Federal Reserve began tracking such data, total consumer debt has declined only twice: in 1991 amid the Savings & Loan Crisis, and in 2009 during the Great Recession.
The dollar value of debt will almost always grow due to factors such as:
- Population growth
- Economic expansion
- Rising incomes
- Better access to credit
Households have better control of their borrowing
One of the simplest and most logical ways to measure debt for either an individual or the economy as a whole is to compare it to income. Since it was initiated in 1979, the Federal Reserve’s Household Financial Obligations Ratio (FOR) does just that.
The most recent FOR, through the fourth quarter of 2016, showed consumer debt payments relative to disposable income at lows generally not seen since the early 1980s; a time when exceptionally high interest rates made borrowing extremely expensive. Required debt payments considered in this measure include: mortgage payments or rent, homeowners insurance and property taxes, consumer debts (including credit cards) and auto-related payments.
Consumers are also handling their debts better than they have in decades. Over the last two years, fewer borrowers have been delinquent on their loans and leases (defined as payments more than 30 days overdue) than at any other time in the last 30 years, according to Federal Reserve data.
Low debt levels provide economic support
Consumer finances are always an important consideration as to where the U.S. economy may be headed. After all, consumers account for nearly 70% of U.S. economic activity according to the Commerce Department. When debt payments take up more and more of disposable income, consumer spending eventually suffers as does economic growth.
When debt levels are low, however, we believe it provides a strong foundation for economic prospects over the intermediate term. Low debt burdens give consumers greater spending power and an ability to increase their borrowing should they choose to do so. This provides an important underpinning for continued economic growth, which should help maintain a generally favorable investment environment.
The key for individuals and families is to adjust their financial strategies based on personal circumstances and trends in the broader economy. Your advisor can help you assess this and provide guidance to build your financial position.