Consumer Debt Outlook August 2018

Highlights

  • We expect revolving debt to stay above $1 trillion heading into 2019 after falling below that level for a few months after the holidays. We also expect that between revolving debt and other fixed-term loans like auto and student loans, consumers will amass a balance of more than $4 trillion by the 2018 holiday season.
  • Headline inflation headwinds approaching a 3% annual rate may explain in part why consumers continue to swipe, even as nominal wages and employment data improve. As current wages are barely keeping up with prices, consumers reach for the plastic.
  • 5%+ annual growth in revolving credit balances are the new norm. Prior to 2018, annual increases were less.
  • Home equity lines of credit (HELOCs) are the one type of consumer loan where balances continue to decline, despite having lower borrowing rates and possible tax advantages. There’s less than $400 billion that’s being borrowed from HELOCs, down from more than $600 billion in 2010.
  • Total student loans outstanding continues to increase from its $1.5 trillion level, but student loan delinquencies continue to decline, thanks in part to income-based repayment plans and other refinancing options.
  • Overall, credit delinquencies remain low.

$ 1 trillion in revolving debt, and not looking back

June saw a modest increase in the amount of outstanding revolving credit, about 90% of which is on credit cards. The $3.5 billion, or 0.3%, increase in revolving debt Americans carry means that, once again, we have more than $1 trillion in revolving debt.

When stacked upon other types on non-mortgage debt like auto and student debt loans, Americans have nearly $4 trillion in household debt. The current level of $3.87 trillion in debt is still on pace to eclipse $4 trillion sometime during the 2018 holiday season, when revolving debts tend to increase the most.

But unlike last year and 2008, when revolving debt briefly surpassed $1 trillion, only to settle lower in subsequent months, there’s no looking back this time. We expect revolving debt levels to continue rising through the rest of 2018 because of these three drivers:

Strong consumer demand. Consumers are spending at a faster rate than during any other time since the beginning of what is now a nearly 10-yearlong economic expansion. In July, retail sales (as measured by the Advance Retail Sales, the Census Bureau’s first estimate of how retailers likely performed) grew at a 6.4% annual rate, the highest monthly read since 2012.

Higher costs. Inflation, something American consumers haven’t thought about in some time, is picking up again. The broadest measure of the Consumer Price Index (CPI), which includes volatile food and energy prices, is currently at 2.9%, the highest it has been since January 2012. And Core CPI — a measure of inflation that sets aside food and energy costs, is at a post-Great Recession high of 2.3%.

Flat wages. Even though unemployment is low (currently straddling the 4% range for much of 2018), wages are either barely keeping up, or in the case of some goods with volatile prices like gasoline, not keeping up at all.

Combine the three factors, and it’s understandable that consumers are currently reaching for their credit cards to help make ends meet. While there are more workers with paychecks to spend, they’re spending their earnings on goods with prices that are rising faster than the wages that pay for them.

Revolving debt with an annual growth rate exceeding 5% is the new norm

June’s 5% annual growth rate is the 19th consecutive month that revolving debt has increased 5% or more annually. Prior to 2017, most observations since the Great Recession have been well under that level.

Mortgage equity remains untapped

Meanwhile, some consumers are building wealth, just in a place that’s either less convenient to access or where they’re reluctant to go. Total home equity has climbed from a $6-trillion level nine years ago to about $15 trillion in 2018.

Nonetheless, homeowners still appear reluctant to tap any of that home equity, even though Americans are staying in their homes longer than ever before.

Unlike increasing unsecured revolving debt balances, HELOC balances continue to decline, as more homeowners retire their HELOCS from the last decade and fewer new HELOCs have yet to replace them. HELOC balances have fallen by more than $200 billion over the past eight years, to $362 billion.

Student loan balances up, delinquencies down

Even though student loan balances will continue to rise above $1.5 trillion, the percentage of borrowers who are delinquent on those loans has been on the decline since 2014, according to recent Federal Reserve data. At the same time, enrollment in income-driven loan repayment plans has increased, suggesting that such plans are helping to keep borrowers current.

Note: This article contains links to Student Loan Hero, which is owned by LendingTree.