There's Still No Household Debt Crisis

I've shown this chart several times now, and each time it elicits strong protests from readers. This update features data for the first quarter of this year that was released by the Fed last week. Note that this chart compares debt-related payments by households relative to disposable income. As such, it properly measures households' debt service burdens. (Comparing outstanding debt to income would show a rising trend, but that is misleading since it compares the stock of debt to the flow of income.)

One point I have been making is still very much valid: household debt service burdens have not increased materially for a number of years, so there is no obvious reason to think that we are now in some brand new era in which households will be behaving differently than they have in the past. Indeed, as the dotted green line shows, debt burdens today are almost identical to what they were at the end of the 2001 recession, and not a whole lot higher (only 4%) than they were in 1987.

Bear in mind that this data incorporates a lot of the housing market collapse, an unemployment rate of 8.5%, the loss of 5 million jobs, and almost the full brunt of the equity market collapse.

I would also continue to assert that this means that once the financial losses from the housing collapse have been fully absorbed—and it shouldn't be too much longer, considering that markets have already priced in most if not all of the projected losses—households could return to something akin to normalcy.

At the very least, it is comforting to me to see that household finances on average have not been materially affected despite all the turmoil of the past 18 months. Indeed, as the last few datapoints show, debt service burdens have actually decreased in the past few years.

UPDATE: Good friend Don Luskin reminds me that disposable income was artificially boosted by lower taxes and some stimulus effects in the first quarter, so adjusting for that would mitigate the degree to which debt service burdens fell.

Comments

[TradingHelp...:]

Great article. One observation:

There being a crisis and the broad recognition of it, are two different scenarios. 2000 and early 2008 regarding equity valuations and the integrity of the banking sector respectively are two suitable examples.

Jul 08 04:02 AM

[Scott Schaefer:]

I too am somewhat surprised by your graph/statistics. As you provide no direct reference, I went looking ...

I first thought your statistics were from FR's Flow of Funds (Z.1); that data series contains figures for disposable personal income, but not for debt service payments. Thus, I am reasonably confident that your data is from FR website which can be reached by the "Website" link above.

According to that link, these data are based on:
1) the 2005 FINANCE COMPANY SURVEY (!),
2) NIPA annual revisions,
3) historical revisions to mortgage data in the Flow of Funds, and
4) new seasonal factors.

Is it thus correct to assume that, while the disposable income component is from the latest quarterly Z.1, that both payment components are based on 2005 survey data + NPIA revisions + seasonal adjustments ??

Jul 08 08:07 AM

[pokernut:]

Calafia is a stock pumper. He has been bullish on stocks all the way down. What a loser.

Jul 08 08:32 AM

[Bruce Krasting:]

Interesting data/article. From these numbers I can't see the stress in the system. But obviously it is there.

I think the problem is the asset side of the equation. From the numbers you show the debt burden side is not much changed. But the asset side is down by 20-30%. If you owe $250k on a $300k house you have equity and you can afford more debt. Now that house is worth on $200k so you are underwater by $50k. Now you can not afford any of those old debts and you will default.

Don't just focus on the liability side of things. That gives a bad picture that does not explain our crisis. It is the asset side of things that we have to worry about.

Jul 08 08:41 AM

[frosty:]

Go to the T2 Partners presentation at www.businessinsider.co...
and you will get a very, very different perspective. Basically their well documented analysis shows that the credit crisis is very far from over, in their works the middle innings, another minus 15% to 20% to go in housing prices, and the recent stabilization is "the mother of all head fakes". Even if their forecast is too bearish, if you just look at the current state of affairs in all areas of credit risk you will come away non-bullish at the very least.

Jul 08 08:51 AM

[TracingError:]

What flawed logic!

By looking at payments, you ignore all those who are unable to make payments.

But that is precisely the debt crisis. Trillions of debt will go unpaid, millions of households going bankrupt, lots of foreclosures. But you take them out of the denominator.

Meanwhile, those who are measured by your numbers will be scared to spend and take on future obligations, knowing they too might be on the razor's edge. That's why the savings rate is increasing.

Jul 08 08:54 AM

[Archman Inv...:]

Let me start off by singing a little song I remember from Sesame Street for it captures the tone of every single one of this shill's articles:
"Sunny days, sweeping the clouds away"..La La La..etc.

Our happy go lucky author is part of the Larry (the recession is over) Krudlow and company crew (Dennis Kneale included) who as millionaires have absolutely no understanding of the average American family who earn $45K per year and are barely surviving.
They cannot relate to them, nor do they want anything to do with them, wether they admit it or not.

The author is a former asset manager who over his years I am sure has amassed quite a bit of cash in his bank accounts. I am sure the author does not lose a moments sleep over the current economic crisis.

Let me jump to the end of the article where he admits his good friend is Don Luskin. Wow talk about a death wish. LOL.
Yes the same Don Luskin who said prior to this entire economic collapse:
"The whole atmosphere of doom and gloom and the notion that sub-prime is going to open up a hole in the earth and swallow everything up is just ridiculous."(Summer 2007)
"This is just a minor jobs recession, no big deal. You should be buying stocks hand over fist" (Summer 2008)

Had anyone listened to this man (I am sure a few million who see CNBC as real information did) you would have lost 80% or more of your net worth. Cased closed. If this was medieval times Don Luskin, et al, would have been taken out in the street and stoned for his lies, because that is exactly what they are, lies.

Now onto the author and his pathetic rationalization of our current debt crisis. It is a debt crisis, make no mistake.

You see, the author can say whatever he wants and rationalize whatever he wants, for the same reason the financial "experts", mutual fund managers, CNBC etc can.

Zero Accountability.

It does not matter if they are dead wrong and continue to be dead wrong, they will not be held accountable regardless of how much wealth is destroyed.

Ask yourselves, how is it if there is no debt crisis, credit card debt remains close to a trillion dollars still owed by households and defaults every single month are increasing? Credit card debt as whole is actually increasing because people as a last resort are turning to plastic to pay for things knowing they are going to default anyway (So might as well say the heck with it)
Why are loans of all types defaulting more and more every month?
Car loans, home equity loans, mortgages, car leases, boat loans, etc. Every single one of these items are increasing in the defaults.
Why? Because they are debts. Debts people cannot afford to pay anymore.
Why are foreclosures still increasing? Well lets see. People owe money on mortgages and cannot pay it back. Another debt that people cannot pay.

Notice I used the word "increasing"? And there is no household debt crisis? Of course there is. I don't care what sort of charts or other nonsense is displayed (if we can even believe the validity of the chart and its source) but all I know is what I see, read and hear.

Folks these sort of articles by this author and others like Dr. Mark (I have 10 PHD's and you don't) Perry, are nothing more than bold faced lying propaganda to get you "excited" about stocks and the markets. Their sole job is to keep you in the markets so all their buddies can keep making money off you.

They all know each other. This author, Larry Kudlow, Dr. Mark Perry, Don Luskin. They are all part of the elitist group that keeps telling you what you WANT to hear, not what you NEED to hear.

Ignore them. Every day is a sunny day for them, regardless of what is going on in average America.

For the record, I am mostly long stocks, just not the crap that is peddled by the usual Wall Street shills looking to capitalize on average Americans.

Jul 08 09:05 AM

[pokernut:]

Scott Grannis has no sense of shame. Every article he writes has a biased and distorted bullish spin. His postings are borderline fraud, pure and simple.

Jul 08 09:16 AM

[pokernut:]

"Good friend Don Luskin ... "

What a joke. I am NOT impressed!

Jul 08 09:21 AM

[icandoitdon:]

tracing error is spot on. this idiot doesn't even understand the limitations of his own statistics. if you weren't suspect of this article from the first word, his mention of "don luskin" should have sealed it for you.

Jul 08 09:26 AM

[Archman Inv...:]

TracingError:

I gave you a HUGE thumbs up for your comment. Though mine was more personal ( because people such as the author should be put in jail for their bold faced lies) I appreciate your comment for it really puts the author and his lying article rightfully in its place.

Jul 08 09:32 AM

[Carlos Lam:]

Aside from the friendship with Don Luskin and dated data, there's another flaw in Calafia's thesis: Household debt is just under 100% of GDP. Even if debt SERVICE is manageable (and that's an open question at this point), there's no way that households can take on even MORE debt to finance consumer purchases. Indeed, households are being smart and REDUCING their debt level even though the President and Congress are attempting to get them to take on more debt via Cash-for-Clunkers and mortgages for 125% of a home's appraisal value.

Jul 08 09:46 AM

[Bull Run:]

Still NO sign of home foreclosures, NO evidence of unemployment, NO housing collapse, NO credit card defaults, it must be a perfect world out there.

Jul 08 09:47 AM

[robert.b.fe...:]

Let's see: Unemployment is the highest in 25 years, foreclosures and credit card defaults at the highest levels ever. I'm glad the author cleard up the alarming crises management idea I had about staying long in cash. Now I can just go out and buy equities at random because it's obveous there is no crises. Didn't you guys see the pretty chart. Every day is a holyday and every meal is a banquete.

Jul 08 10:01 AM

[Michael Dav...:]

An obvious rejoinder is that consumers at the margin define the health of the economy. The macro statistics you site show obligations to be flat over time since 1980. The conclusion is: We don't have a debt problem. I wonder if the real question is the health of the bottom 10% or 15% of borrowers? Or are the numbers wrong? The graphs of debt-to-GDP show debt doubling for consumers since 1980. How could the payment obligation stay the same if the debt doubled?

Jul 08 03:03 PM

[Gregman2:]

Hey BullRun: it "is" a perfect world out there. Which is why I'm loading up a large bowl of green shoots...to draw a power hit! I luv wacky tobacky! Hey Calafia...wanna hit?;-) See: www.thinktanktv.com/me...#

Jul 08 07:58 PM

[Mr. Ed, Jr.:]

"One point I have been making is still very much valid: household debt service burdens have not increased materially for a number of years, so there is no obvious reason to think that we are now in some brand new era in which households will be behaving differently than they have in the past"

So you think that even though household debt has increased from 70% in 1986 to 100% of income in 2001 --- to 130% of income in 2009, it won't make any difference in consumer behavior ?

Your chart shows only the % of debt that is being serviced from disposable income. There are limits on what consumers can pay from their disposable (after tax) income-- it is not limitless. Real world indications are that the consumer can't go any higher in monthly debt payments.

But maybe you have not noticed that the limits have been reached in many households. That is why foreclosures, NOD's, credit card defaults and bankruptcies are soaring. It is also why the consumer has put the brakes on consuming.

What matters to households is that they have gotten themselves in way over their heads. Monthly debt payments have risen, but to a lesser degree than the debt level, because they CANNOT rise to meet the debt level-- the income is not rising.

So we have defaults instead of vastly increasing consumer debt payments. Yet you post this nonsense chart about monthly % of income used to pay bills.

I can't tell if you are trying to mislead or you just don't get it. But either way, it is nothing to brag about.

Here are links to some people who have a better understanding of the situation:

globaleconomicanalysis...

www.marketoracle.co.uk...

Jul 09 04:00 AM