Sorry, But Consumer Debt Levels Are Not Nearly At Crisis Levels

Posted: Jun 04, 2018 11:00 AM
Sorry, But Consumer Debt Levels Are Not Nearly At Crisis Levels

Early in my career, a mentor once told me that “perception is reality”.  There is a certain degree of truth in that statement, but it is certainly not complete truth.

A scholar friend of mine once told me that the Latin word for “data” is the same root word used for “gift”.  Therefore, data are a gift.

For close to 20 years, I have run a financial planning & wealth management practice.  For 16 of those years, I have been a Certified Financial Planner™ practitioner.  According to the CFP Board of Standards, there are six main areas of financial planning: current situation (net worth, cash flow & cash reserve), investment planning, retirement planning, tax planning, protection planning & estate planning. While this may be true, the six areas are not equally weighted.   Every component of the financial planning process is important.  However, investment planning commands most of my time because it commands most of my clients’ concerns.

Over the years, I have found that a solid portion of client meetings are discussing the equities markets.   When discussing the equities markets, it’s common to drift toward geo-political affairs.  Since I serve an eclectic group of clients across a very broad political spectrum, I try to stay away from politics and stick to the data.   However, there are times when I find myself having to overcome a client’s perception of reality, because sometimes their perception is not reality at all.

Take for example the numerous reports that we’ve been seeing about consumers increasing their debt loads.   The thesis of most of these articles is that increasing debt will lead to another consumer financial crisis.   Naturally, when anyone reads these pieces they are lead to believe that we have a debt crisis re-emerging.  That’s their perception because that is the thesis of these reports.  Unfortunately, it’s not reality.  Here’s the real story:

(Chart courtesy of Optuma)

This chart is the Household Financial Obligations as a percent of Disposable Personal Income.   It is published by Federal Reserve Economic Data, affectionately known as FRED.  The chart clearly shows that the household obligations ratio has indeed been rising. However, one should not be as alarmed. First, the ratio is coming off historic lows, so to see the ratio rise should not be at all surprising.   Secondly, in looking at the ratio historically one can see that we are nowhere near the levels immediately preceding the last three recessions.  We should also keep in mind that credit cards were just beginning to become wallet mainstays in the 1980s.

So, while the reports of rising debts are accurate, they are incomplete.  When we look at all of the data, we can see that the household obligations ratio is coming off historic lows.  Therefore, of course it’s rising.  It can’t stay at historic lows indefinitely.

Perhaps, instead we should look at all of the data prior to drawing any conclusions.  The data are a gift and if we use that gift properly, we can draw accurate conclusions.  The conclusion here is that the American consumer is in a very healthy position.

The views expressed here reflect the views of C. Theodore Hicks II, CFP as of May 23, 2018. These views may change as market or other conditions change. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance.  Past performance does not guarantee future results and no forecast should be considered a guarantee either.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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