Consumer debt has hit an all-time high of 26% of disposable income. In the past five years, consumer debt has outpaced income growth by roughly twice. As a reminder, consumer debt excludes mortgages and home equity loans. The growth in consumer debt has been driven by auto and student loans, no surprise there.
However, what does this portend for the consumer and our economy? According to Ray Boshara, Senior Adviser and Director, Center for Household Financial Stability could be both positive and negative (now doesn’t that sound just like an economist). According to Ray, the significant growth in consumer debt could reflect American’s greater confidence in the economy, willingness to invest in assets that build wealth, such as education, and it can also signal that consumers have taken advantage of the lower interest rate environment by paying off previous loans and are now seeking additional borrowing.
However, this growing debt could signal trouble ahead for the U.S. economy, as families use debt to acquire necessities. Rising family debts can diminish future economic activity. In a period of rising rates, the extra interest burden could put this debt at risk of repayment. We are already witnessing troubling trends with regard to the repayment of the massive U.S. student loan debt (roughly $1.5 trillion).
In any case, the growth of consumer debt relative to income growth certainly reduces the amount of disposable income available to fund retirement accounts, in an age where individuals are already contributing far less than what is necessary to build an adequate retirement nest egg.