Friday, December 23, 2022

Consumer debt risk - Not seeing a problem, provides recession protection

A recession spells disaster for consumers, and the deterioration of consumer balance sheets is a good indicator that the economy can turn. It also tells us the potential size of the recession. Poor balance sheets going into recession will mean the downturn will be deeper and longer. 

We are looking at consumers that are in good shape. The number of foreclosures and bankruptcies are low by historic standards. Delinquencies are loan with a big decline in student loans given the government pandemic moratorium. Total debt balances are rising, but wealth has also increased so the balance sheets are in better shape.

The problem will come with the repricing of debt with the rise in interest rates. Consumers should borrow less, and interest expenses will take a bigger chunk form income, but rates that are fixed at low levels will protect consumers from Fed policies. Inflation is eating into the purchasing power of assets, but it also reduces the value of liabilities for creditors. It is possible that a soft landing may occur given the better consumer balance sheet characteristics.   

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