2019_04_18 — “Do You Question the Size of the Debt or the Ability to Service It?”
By: Michael Ashley Schulman
Tags: Asset Management, Debt, Family Office, Trump, Wealth

April 18, 2019

Do You Question the Size of the Debt or the Ability to Service It?

Debt Size Versus Ability to Service

Summary

U.S. household debt is relatively low versus household assets.

The center of the U.S. has relatively much less debt than the coasts.

The implications of this variance remain to be seen.

Do you question the size of the debt or question the ability to service it? In other words, do you look at the total cost of a car, or rather how much you can afford to pay per month for a car? The answer is, it depends.

Regarding U.S. household debt, even though it is at record highs, it is relatively low versus household assets. In a healthy growing economy, one would expect both debt and assets to expand, and that is what we see. Consumer leverage, as measured by the Federal Reserve Board’s Household Financial Obligations Ratio (Recurring Monthly Payments as a Percent of After Tax Income) is near its 40 year range lows [Infographic 1]. The household Debt Service Ratio (DSR) is the ratio of total required household debt payments to total disposable income. In addition, even though some financial headlines may blast fear into the market psyche about auto loan delinquencies of 90 days or more reaching record highs and student loan delinquencies of 90 days or more reaching record highs, total serious delinquencies of 90 days or more across all household debt has declined in half since 2010. Thus, although nominal household debt is at record highs, the U.S. consumer is not stretched and has ample room to keep consuming; and as we know, the consumer tends to be the life blood of the U.S. economy.

Infographic 1: Household Debt Service and Financial Obligations Ratios — released Monday, March 18, 2019

Maroon line: Financial obligations ratio, seasonally adjusted

Blue line: Debt service ratio, seasonally adjusted

Source: Federal Reserve Board

Interestingly, the U.S. Household Debt-to-Income Ratio is not evenly distributed across the country. Higher debt to income counties and states (rust colored) are on the coasts and the lower debt to income households (green colored) are in the center of the country [Infographic 2]. The map pattern looks similar to the general division between area that supported President Donald Trump in the last presidential election and those that didn’t; states with higher debt to income have tended to lean Democratic, whereas states with lower debt to income levels have tended to lean Republican.

Infographic 2: County-Level Debt-to-Income Ratio, 2017

Source: FRBNY Consumer Credit Panel/Equifax, Bureau Labor Statistics https://www.federalreserve.gov/releases/z1/dataviz/household_debt/state/map/#year:2017

Are center states prudent or neglected? Although it would be a stretch to jump to conclusions here, A) Either center states are prudent and have ample leeway to leverage and increase their spending power relative to the coastal states and effectively improve their lot under the current administration: i.e., Trump’s voter base should be in a good position economically; or B) Banks and lenders have determined that there is not enough excess disposable income in those center states to extend credit and hence the lack of debt to income: a decidedly less positive scenario.

Michael Ashley Schulman, CFA

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Disclosure: The views and opinions expressed are those of Michael Ashley Schulman, CFA and are subject to change without notice. The views and opinions referenced are as of the date of initial publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Forward-looking statements cannot be guaranteed; neither can backward-looking nor current-looking statements. This material is provided for informational purposes only and does not constitute an offer or solicitation to purchase or sell any security or commodity or invest in any specific strategy. It is not intended as investment advice and does not take into account each person’s or investor’s unique circumstances. Information has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Past performance is no guarantee of future results.