The permabears are passing around the narrative that sooner or later, the U.S. is going to topple under the weight of its own debts. Isn't this alone reason to be skeptical of stock markets tapping all-time highs, they ask?
Total U.S. Domestic Non-Financial Debt is $47.0 trillion. Yes, trillion with a "T." Here are the numbers broken out:
- Household debt: $14.6 trillion
- Non-Financial business debt: $13.4 trillion
- Government debt: $19.0 trillion
It's a frightening narrative being passed around, but one that doesn't hold together upon closer scrutiny of the data.
Across a variety of metrics, U.S. corporate and household debt service ratios – the ratio of debt obligations to available cash to service those obligations – are very low by historical standards. The obvious implication is that there's ample cash to manage existing debt obligations.
"These are the three most important charts that support incremental runway for the current expansion," writes Hedgeye Senior Macro analyst Darius Dale.
1.
As you can see in the chart below, the U.S. corporate debt service ratio of 38.8% is low compared to where it was at the peak of prior cycles in 2009, 2001, and 1990. The lower this ratio is, the more able companies are to service their existing debts.
2.
U.S. household balance sheets are as healthy as ever. That about sums up the chart below. As you can see, the debt service ratio for American households has yet to find a bottom as the debt service ratio continues to fall, meaning cash to service debt continues to rise faster than existing debt obligations. Meanwhile, there's still room for corporations to add debt compared to levels hit during The Great Recession and 2001 Recession.
3.
The level of credit-to-GDP for both U.S. households and corporations is also well below prior pre-recession peaks. The current credit-to-GDP ratio for households versus the trailing 10-year average, reveals a level of -1.4, well below historical levels hit during prior economic crises. During The Great Recession, this "credit gap" measure was 1.6 and 2.1 for 2001 Recession. Corporations are at a level of 1.3, versus 2.8 and 1.9 for similar time periods.
All of this implies that we haven't yet reached the doomsday scenario levels that permabears are touting. Yes, government debt remains an overhang – particularly in the context of Trump’s proposed fiscal expansion, but expansionary fiscal policy is actually positive for the economy and cycle during its implementation. That would seem to suggest any debt-related headwinds are likely a 2019-20 event at the earliest.
