Sunday, February 26, 2017 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCXV

American Consumer Debt

Since consumer spending is a huge driver of American GDP (almost 70% of GDP), it's a big deal for any investor. The same isn't true for some other countries where consumers aren't a big part of the GDP. Consumer spending is heavily influenced by consumer debt and here is how the picture stands right now.

As can be seen from the very good Bloomberg chart (original source is New York FedRes I think), consumer debt shot up to around $13 trillion in 2008. After the financial crisis, debt declined, as mortgages shrunk. But as the economy improved in the last few years, it looks like debt has been increasing and is near the pre-crisis levels.

(source: "Car Loans on the Rise as U.S. Households Borrow More: Chart," Anne Riley Moffat‎, Bloomberg, February 17, 2017)

Not easy to tell from the chart but the big changes in my opinion are the increased auto loan and student loan portions. Auto loans apparently stand at the highest amount in more than 17 years (based on another article I read recently). Anyone investing in the auto sector should be careful. There is no doubt that auto loans should be higher now than, say, in 2000, because the economy is bigger and population is higher. However, it's not clear how much of it is unsustainable. The market is already pricing some of this in--P/E ratios of many car companies are at or less than 10 vs S&P 500 at more than 25--but you should still be cautious.

Student loans are much bigger (at least 2x more) than what it was a decade ago. More of the population is pursuing higher education so it should be higher. However, it seems far larger than what it should be, and I suspect it is unsustainable (given that median household income has not increased materially for almost 20 years). Having said that, we probably won't see as much adverse outcome from student loan defaults since it is largely socialized (i.e. government subsidized and government will probably write off a chunk of the student loans).

As for credit card debt, it looks similar to what it was for the last few decades. In fact, it looks a little bit smaller than 2008. Not sure what happens if interest rates rise but we shall see.

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