"When the party's through ... seems very sad for you; Didn't do the things you meant to do." — from "Day is Done" as performed by Nick Drake
Consumer debt is approaching levels not seen since before the Great Recession. And on the flip side, personal savings as a portion of disposable income is now at its lowest level in 12 years.
Some of this is certainly understandable. People feel they "can breathe" again in terms of personal spending and borrowing. The economy is improving, unemployment is down, and folks feel comfortable with their financial circumstances.
Traditionally, Americans also feel more inclined to borrow when markets are on an uptick, as they were in 2017. People look at their balance sheet and see their assets climbing in value and say, "Hey, I'm worth more now. I can afford to borrow more, spend more and save less." The net worth of American households rose by $41 trillion in the third quarter of 2017 alone. This “wealth effect” impacts consumer behavior.
In late 2017, repayment schedules on new car loans reveal a fascinating story. Americans purchasing new autos signed on for an average repayment period of 69 months, or just under six years. The Wall Street Journal noted that "in the fourth quarter (of 2017), consumer debt, excluding mortgages and other home loans, rose 5.5 percent from a year earlier to $3.82 trillion." That's the largest increase since 1999, the first year that statistic was recorded.
Meanwhile, Americans are saving less money than at any time since the end of 2007. Savings rates also remained low during the housing boom in the two previous years, 2005 and 2006.
Many Americans borrowed heavily as interest rates remained relatively low these last few years. We purchased homes, plowed money into business opportunities, and increased our discretionary spending. But volatility in markets, dormant for almost 18 months, reared its head again in February. In addition, the Federal Reserve seems committed to raising interest rates. This combination, intertwined with other global forces, could portend an economic slowdown.
When a downturn occurs, and everyone retrenches simultaneously, that six-year car loan may not feel so comfortable. It's certainly advisable to invest in valuable opportunities and fun to spend freely during healthy economic years, but it's equally important to save money to see us through periods of economic slowdowns. Consuming and saving simultaneously may seem like an oxymoron, but truthfully, the two activities are not mutually exclusive. Spending and borrowing is fine, but it’s equally important to prepare for periods when economic expansion is not occurring.
Folks eschewed personal savings while enjoying rising asset values twice in the last 20 years: just before the dot.com bubble in the late 90s and again before the Great Recession nine years ago.
Margaret R. McDowell, ChFC, AIF, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.