An economic look at the State of Credit

In 2017, a meaningful jump in consumer sentiment bolstered spending, and caused the spread between disposable personal income and consumer spending to reach an all-time high. This increase in spread was mostly financed through consumer debt, which according to the Federal Reserve Bank of New York has brought total consumer debt to a new peak of $12.8 Trillion surpassing the prior peak in 2008. The Experian eighth annual State of Credit report greatly supported the consumer behavior trends observed for the past year.

Spanning the generations

 It is no surprise that generation Z (the “Great Recession Generation”) is conservative and prudent in their approach to credit because they are the most familiar with the post financial crisis economy.

Results showed Millennials experienced a drop in overall debt, and an increase in mortgage debt reflects the national homeownership affordability challenge facing this generation. As first time homebuyers, millennials have to relatively tighten their spending as they dedicate an ever-growing portion of their income to housing.

On the other end of the spectrum, the results of the study showed that Baby Boomers’ had sizable debt (including mortgage debt), which reflects the generation’s intent to stay active in their communities and in their homes much longer than prior generations have done. A recent Harvard study reported that by 2035, one out of three American households will be headed by an individual 65 years of age or older, compared to current ratio of one out of five households.

What’s on the horizon?

It is reasonable to assume that these trends may continue into 2018, as the underlying conditions continue to persist. A closer eye should be kept on student and auto loans due to the significant increase in portfolio size and increasing default rates compare to other debt.

Editor’s note: This post was written by Fadel N. Lawandy, Director of the C. Larry Hoag Center for Real Estate and Finance and the Janes Financial Center at the George L. Argyros School of Business and Economics, Chapman University.

Fadel joined the George L. Argyors School of Business and Economics, Chapman University after retiring as a Portfolio Manager from Morgan Stanly Smith Barney in 2009. He has two decades of experience in the financial industry with banking, credit management, commercial/residential real estate acquisition and financing, corporate finance, mergers and acquisitions, quantitative and qualitative analysis and research, and portfolio management. Fadel currently serves as the Chairman of the Board and President of CFA Society Orange County, and is an active member of the CFA Institute.