The US consumer is the biggest driver of the world’s largest economy, so we regularly check on their financial health. In this note I explore:
This analysis should give us an indication of the potential future economic growth as well the potential for banks to grow their assets and for retailers to grow their sales.
In aggregate, the US consumer has deleveraged significantly since the Global Financial Crisis (“GFC”). At the end of 2007, US households had debt that was the equivalent of 130% their disposable income, 10 years on, at the end of 2017, that ratio was less than 100% (the lowest it’s been since 2002).
Debt conclusion: There is scope for US consumers to increase borrowing, particularly mortgage debt (as homeownership rates trend higher) and credit card debt (which is ~25% below its pre-GFC peak relative to disposable income). Banks have reported reasonably good demand for mortgages and lending standards are easing, which should be supportive of increased homeownership and growing bank assets. Recently demand for credit card debt has turned marginally negative, though lending standards are still supportive. Perhaps the biggest headwind to increased consumer lending is the mountain of student debt?
Savings have seen significantly negative trends recently. Household austerity allowed US consumers to build up a savings buffer in the wake of the GFC (getting savings rates up above 6%, a level last seen in the 1990’s). Savings levels are now back to their pre-GFC lows as US consumers started dipping into savings from 2016 (a trend which accelerated after the election of Donald Trump in late 2016).
Had US consumers maintained the relatively healthy savings buffer (~6% of disposable income), they would now have aggregate savings of ~$ 900 billion, instead they have $ 380 billion meaning:
Savings conclusion: US consumers have depleted savings in the last couple of years, ostensibly bringing forward some of the spending that would have resulted from lower taxes and higher wages over the next few years. With much of the consumption boost from higher taxes and lower incomes already reflected in recent economic growth, wage growth will likely need to meaningfully outperform high expectations going forward to generate above trend consumption spending (particularly as consumers potentially need to forgo some consumption to replenish savings).
For a period of 6 years from 2007 to 2013 US home foreclosures spiked, causing around 5 million (out of 76 million) Americans to lose their homes. (That’s 5 million more than would have lost their homes in a more “normal” foreclosure environment.
As the US population grows, it typically adds about 800 thousand to 1 million households each year. In the 15 years leading up to the GFC, most new household formations were buyers of homes. In some years there were even more new homeowner than new households as there was a net switch from renters becoming home owners.
Since the GFC almost all new household formation was in the form of renters (not to say there were no new homeowners, but the demand for home purchases was more than met by the supply of home owners being forced out of the market.
The tide turned in 2017 as the wall of supply from GFC foreclosures seems to have been mostly absorbed and home ownership rates started to tick up.
Unfortunately for Americans diving into to home ownership this late in the cycle, history would suggest that much of the wealth generation from house price appreciation is probably behind us for this cycle and has largely accrued to those able to hang onto their houses through the GFC.
Fortunately for the many Americans who are looking to enter the housing market, average affordability is still decent according the National Association of Realtors, who calculate an index that measures the ability of Americans to qualify for a mortgage (to buy a house valued at the median house price based on median American income). This index still suggest that houses are very affordable – anything above 100 is good (though with the affordability trending lower).
US banks are also reporting that on average they are seeing decent demand for mortgages and lending conditions are being eased.
All this suggests that banks should be able to grow their mortgage assets at a decent pace for the foreseeable future. Of the largest US Banks – JP Morgan, Wells Fargo & Bank of America all have about one third in US mortgages and so growth in that area could deliver meaningful asset growth. Wells Fargo would potentially stand to benefit most, though their recent censure by the US banking authorities restricts them from growing their assets. Citibank is more focussed on consumer loans and will benefit least from increased mortgage demand.
As far as non-mortgage consumer debt is concerned, that has also grown at a much slower pace than US disposable income. Home equity loans have been the category that has disappeared the fastest, but also the one that’s least likely to make a comeback. Credit card debt and other consumer credit (overdrafts and short-term loans) have also shrunk relative to disposable income and have the most scope for growth, though student loans have been consistently growing relative to disposable income and could potentially have crowded out the appetite for other consumer debt?
Part of the willingness of consumers to dip into their savings to fund consumption over the last couple of years is the expectation of higher wages, but another source of anticipated higher disposable income is Trump’s tax cuts. Consumers should see disposable income grow by around $ 1.2 trl over the next ten years, with almost half of that coming in the next 3 years.
If Americans follow historical trends and spend 60% of the tax savings (i.e. save 40%) – it will take them another 3 years to replenish the savings they’ve spent in the last couple of years.
US consumer savings as a percentage of disposable income