Consumer Debt Trends

March 24, 2022

Source: NY Federal Reserve Source: NY Federal Reserve

Household debt has been on the rise in recent years, driven primarily by mortgage originations. This week’s chart focuses on the non-household debt portion of the consumer balance sheet. Student loans and auto loans make up the greatest share of consumer debt, representing 10.1% and 9.4% of total outstanding balances, respectively. Positive growth rates were observed across all consumer debt categories in 2021, with the largest year-over-year increases seen in auto and credit card loans (6.1% and 4.5%).

In the asset-backed securities (ABS) market, many transactions are tied to these non-mortgage consumer debt loans. Despite the incredible stress placed on labor markets over the past two years, consumer credit has been resilient. Delinquency rates across the major consumer product types fell after the onset of the pandemic despite rising unemployment and remain at or near cyclical lows. I expect some normalization of credit performance this year after multiple rounds of stimulus programs.

The U.S. consumer is financially healthy, with household net worth near record highs. Personal wealth has advanced significantly by virtue of home price appreciation and stock market growth. In addition, household liabilities declined as low rates have contributed to the drop in household financial obligations while incomes have risen. Pandemic spending restraint led to a rise in household savings, and consumers used part of the savings to reduce non-housing consumer debt.

As we move past the pandemic, consumers have been more willing to borrow while lenders have been more willing to lend as the employment situation improves and coronavirus concerns fade away. Consumer debt is expected to increase, driven by higher spending and the withdrawal of stimulus programs. However, given recent macroeconomic risks, funding costs are beginning to rise. Although the consumer balance sheet is healthy, I expect savings to normalize and result in increased demand for unsecured debt.

Key Takeaway    

Credit performance has been strong across most ABS sectors over the past year and a half as improving labor market conditions and positive economic growth have been supportive of ABS credit fundamentals. While I expect ABS credit performance to remain healthy in 2022, current headwinds such as inflation along with rising energy costs are likely to remain under upward pressure, which may impact consumer spending and borrowing behaviors. Inflation will have a greater impact on lower-income households. There is a cautious outlook for borrowers with lower FICO scores who seek personal loans, as credit performance may weaken, especially among subprime borrowers.

The ABS market offers a diverse selection of consumer risks and yields, and generally features shorter-duration investments. Stable credit trends for underlying consumers are reflected across ABS performance, as well as rating migrations. For the balance of the year, I expect continued supportive lending conditions along with relatively benign credit metrics, which look favorable relative to historic measures. In this environment, I favor high-quality, seasoned transactions as focus areas of opportunities for outperformance.     

Tags: ABS sectors | Consumer Debt | Household debt | Labor Markets | Inflation | ABS

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The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.

This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.  This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

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