Why It May Be Time to Worry About Household Debt

So I see this article today on why we should not worry about household debt:

https://seekingalpha.com/article/4099560-worried-household-debt

As the argument goes, while household debt is at record levels, no need to worry as GDP is up significantly as well.  The author includes nice charts apparently seeking to show how an increase in household debt this past quarter of a mere $114 Billion (yes, that is with a "B") is nothing to worry about.  This is apparently despite the fact that flows of credit card debt into early and serious delinquency have increased over each of the past three quarters, which is a trend not seen since 2009.  Hmmm, what was happening in 2009 I have to wonder.  And increases in auto loan delinquencies, especially in sub-prime, are also on the rise.

http://www.calculatedriskblog.com/2017/08/ny-fed-household-borrowing-grows.html

This "there is no need to worry" article goes on to cite stats, taken from the St. Louis Federal Reserve site FRED, to substantiate his claim.  He notes that while liabilities have surged, so too have assets.  He notes that the overall quality of the debt, as in credit scores, has improved, which also should lead to less worry, and brushes off the point that mortgage loan standards have improved significantly while standards for student loans (due to government guarantees) and, especially, auto loans, have deteriorated.  He notes the latter two are only 20% of the overall debt.  Fortunately for us, he ignores that this only equates to about $25 Trillion (that is with a "T) of total household debt.  Did I mention credit card debt deteriorating as well? 

He fails to mention that the vast majority of increase in GDP is going to the top 10% of income earners with the bottom 90% barely moving in GDP since 1980 in inflation adjusted terms. Income disparity is over the top as is the inability of those in the bottom 90% to service debt.

http://www.motherjones.com/politics/2016/12/america-income-inequality-wealth-net-worth-charts/

The author finally - at the behest of others - does include a chart from the FRED site on median income versus debt, which shows the slight decrease over the past few years in household debt relative to median income, but you might observe that the improvement there is not nearly as defined as the improvement in total  GDP versus debt.  Moreover, it shows median income versus debt only back to levels around 2006, shortly before the worst recession since the Great Depression. 

Point being, be careful in understanding the stats you are being shown.  Indeed, if you look back just a few years before 2006, say to 2002, we are today nearly 50% over the median income to debt levels then and almost 300% over levels shown in the chart for 1984 - go figure.  Sounds to me like nothing to worry about - don't you agree?  Or perhaps not.

Finally, let me note that due to the mortgage debacle in 2008, the mortgage debt is still below where it was in 2008, meaning that the "record" debt today is slanted more toward credit card, student loans and auto.  Last I checked, at least the auto and credit card debt tends to be a significantly higher rates per annum than mortgage debt and needs to be paid off - or at least should be paid off - in a much shorter timeframe than 15-30 years. 

Debt is worrisome and not to be ignored as it was a decade ago. Do not get me started on corporate debt.  Whatever happened to the advice from our parents to save money, pay off debt and live within our means?  Well, that is a story for another day.

Restaurants - Something To Watch

Here is a negative piece on how foot traffic at restaurants was down a good bit in July.

https://www.nakedcapitalism.com/2017/08/wolf-richter-worst-restaurant-recession-since-2009-dings-inflation.html

I am not wholly agreeing with the doom-and-gloom title as one month does not a recession make, but it is an area to watch.  I similarly saw an article this week where one chain, Applebee's, is reversing course on trying to change their menu and stop advertising to get millennials in the door.

Some of this undoubtedly relates to the same problem afflicting retail stores.  They are way overbuilt.  I saw a piece this week noting the U.S. has five times as much retail space per capita as Europe, which is the main gloom causing all the store closings given on-line sales - which many point to - are only still 8% of retail sales and Amazon (the store closing Devil) is less than a fourth of that amount.  Nope, it seems we overbuilt retail and in my view overbuilt food establishments and now are paying the price.  The "build it and they will come" motto, is not quite working out too well.  Apparently not for Dick's Sporting Goods, whose CEO described retail as being in panic mode, and this for them is despite the relatively recent closure of Sports Authority,.

http://www.zerohedge.com/news/2017-08-15/dicks-ceo-retail-industry-panic-mode

The reason I am focused here on the restaurant numbers (versus retail) is that a lot of the job growth in this recovery has been in service sector jobs like waiters, bartenders and the like.   Indeed, manufacturing has declined, government hiring is not strong, so the vast majority has been in the service sector.  If that reverses, so will the reduced rate of unemployment, which is highly distorted anyway due to the participation rate. 

Again, just an area to watch.  Not worth sleep over just yet.