As Consumer Participation Weakens, Debt Market Risk Rises

You can also see that the credit issuers are happy to increase available credit on existing accounts, to the tune of $4.1 trillion. They are offsetting the increasing risk of higher balances; however, by charging higher interest rates. This is a sign that the credit issuers see higher overall risk in their customer portfolio as the overall debt levels rise.


Despite raising their rates, credit card banks are seeing reduced return on asset levels.


When you consider the rising credit balances combined with minimum fees that don’t pay off principal, credit card debt can be a huge ticking time bomb in the consumer economy. Further, record low mortgage have helped cover up for the rising credit balances. In fact, the largest users of credit card debt are home owners with a mortgage.


Homeowners with other debts are refinancing their homes to pay it off, which the following two charts illustrate. First, cash-out refinancings are at their highest level since the previous mortgage crisis.

Source: Urban Institute

And second, the biggest reason for refinancing a home is to pay off other debts.

Source: Freddie Mac

Despite the fact that consumers are able to finance their current debt burdens, any change in interest rates or a general economic slowdown leading to job loss could change the current debt picture dramatically. That is why it is important to consider how the picture of consumer debt health may change in the near future.

Consumer Spending

Consumer spending trends paint a much clearer picture of consumers ability to participate in the economy going forward. Let’s start with 1st quarter retail sales.

Source: Census

Total retail sales increased only 2 percent from the same 1st quarter period a year ago. Notice in the slowing trend in growth in the bottom-right quarter for the previous 5 quarters, from 5.5% YoY in 1st quarter 2018 to 2% YoY in Q1 2019. It is clear that consumer spending is slowing down.

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