It’s Still Far Too Early to Run for Cover

Aug. 3, 2018
by Bob Adelmann

Despite several recent reports from various sources that appear to indicate the fragile nature of the average American household, a closer look reveals that it’s still far too early to blow the whistle and run for cover. For example the latest from the Federal Reserve Bank of New York reported that, at $13.2 trillion, total household debt increased from $12.7 trillion a year ago, a jump of nearly four percent. Lending Tree, a loan comparison website, reported that the consumer debt part of total household debt will hit $4 trillion well before the end of the year. It added that Americans owe more than 26 percent of their annual income to this debt, up from 22 percent in 2010, and that debts on auto loans and credit cards are climbing by more than seven percent a year.

The savings rate of the average American household has declined to 2.4 percent, nearly a record low.

Last year the Federal Reserve rattled the markets with its survey that indicated that 35 percent of U.S. adults reported that they would not be able to pay all of their bills if they were faced with a $400 emergency.

Kevin Wack at American Banker wrote that in his opinion Americans have learned little from the lessons taught during the Great Recession that followed the financial crisis of 2007-2008: “We still borrow more and save far less than prudence would dictate.”

A closer look reveals a far different and much more comforting picture. First, it is likely that the savings rate is low because interest rates are low. What is the incentive to save when rewards for doing so are so low?

Second, credit card delinquency rates are at just 2.4 percent, close to historic lows. 

Third, total household debt service payments when compared to household disposable income are at just 10.21 percent, down from the 13.22 percent high touched as the financial crisis hit in 2007. In fact, that 10 percent number has stayed remarkably steady since the fourth quarter of 2012.

Even the older generation is in better shape than it has been in years. A study by the Employee Benefit Research Institute (EBRI) reported in March that debt levels among elderly and near elderly have decreased by more than eight percent since 2010, with debt service payments falling a commensurate seven percent. And elders have been paying down their debts too, with older families’ debt as a percentage of assets declining from 8.4 percent in 2010 to 6.5 percent today.

Instead of bingeing on auto and truck purchases and taking out second mortgages and home equity lines of credit to fund current consumption, U.S. households are being more financially prudent than they have been in years.

A quick perusal of the various “apocalyptic” websites (i.e., The Economic Collapse blog, Wolf Street, and others) reveals unusual calm over the coming calamity that some say is imminent. Every party, it is said, must come to an end. But from nearly every quarter it appears that this party is just getting started, making concerns over the average American household’s finances premature.



American Banker: Consumer debt is at an all-time high. Should banks be worried? Elder Debt At Troublesome Levels

CNBC: Consumer debt is set to reach $4 trillion by the end of 2018

The Federal Reserve: Household Debt Service and Financial Obligations Ratios

US Total Household Debt:13.21T USD for Q1 2018

History of the Financial Crisis 2007-2008

The history of the Great Recession that followed the Financial Crisis

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