As Consumer Participation Weakens, Debt Market Risk Rises

I am going to take a look at how well US consumers are doing using some common retail measures. I will also look at how much debt consumers have and discuss whether consumers can keep up their spending levels. Consumer spending makes up the majority of US economic transactions, so tracking consumers is important in determining future economic growth patterns.

Consumer Debt – Mortgages

Consumer debt service payments as a percentage of disposable income appears to be favorably balanced against previous economic cycles, when examine thusly.

It appears that consumers are not painting themselves into a corner through rising credit payments as a percentage of income. However, this is not the full story on consumer debt for two reasons.

First, the biggest credit payment for most consumers right now is their mortgage, per Experian.

Source: Experian

Mortgage interest rates are at 30 year lows and have been there for quite some time. If interest rates rise, consumers will see a significant spike in their mortgage service monthly obligation.


This will be true for new home buyers as well as existing homeowners with adjustable rate loans. In ARMs as they are known, borrowers often get in for low introductory fixed rates only to have their interest costs rise substantially between year 1 and 2 of the loan. Those who remember the mortgage debacle of the last recession will understand the powerful impact that increases in adjustable rate mortgages can have on the financial liquidity of the economy.

Consumer Credit Card Debt Risk Rising

The second aspect of consumer debt that isn’t shown in the disposable income chart above are credit cards. Credit card applications account for the largest increase in credit applications in the past year by a wide margin.

Source: Supermoney

Analysts of the credit card industry note that the minimum payments on credit cards are below the typical interest rate charges. Meaning, making only the minimum required payments increases total interest charges over time. Even though consumers are able to service their credit cards now, they are falling farther and farther behind their debt balances as shown in the following Consumer Debt Trends graphic from Experian.

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