MacroMonitor Market Trends April 2007

MacroMonitor Market Trends highlights topical news and trends of interest to you and your colleagues. If you would like more information about the items in the newsletter or would like to discuss other ways that we can assist you in your research and marketing efforts, please contact us.

Debt Levels on the Rise across All Life Stages

Figure 1: Mean Debt by Life Stage

Data from the 2006–07 MacroMonitor show that outstanding debt among all Life Stages has increased significantly. Recent trends (through 2004) in households' total amount of debt reveal several Life Stages (Oldest Child 18+, Preretired, and Older Retired) for which these amounts didn't grow. Underlying these trends is a shift away from consumer loans and lines of credit and toward debt collateralized by real estate. The mean amounts owed for all types of credit other than consumer loans and lines—first and second mortgages, HELOCs, vehicle loans, credit cards—are up for most of the Life Stages. Despite this evidence of households' having greater debt, many households' attitudes in 2006 indicate a desire to regain control of their finances—61% of households indicate that they would use a $25,000 windfall to pay off household debts. Because the real estate market is in the doldrums, the current levels of debt are high, and emphasis on U.S. households' meager rate of saving (especially retirement saving) continues, any increase in market volatility, inflation, or interest rates might be the catalyst that would push consumers to a tipping point, causing them to spend less, save more, and pay down their debt.

Consumer Reengagement?

Numerous signals suggest that the economy is in good health and the equities markets are on a positive track—signals that have led some people to declare that Americans' psyches have healed from the events of the past six years. Our data seem to suggest otherwise.

For more than a decade, the MacroMonitor survey has asked respondents which of several actions they would take if their household were to have an unexpected $25,000 in the next few weeks. With time, responses to this question have allowed us to gauge consumers' top-of-mind sentiment about fundamental financial trade-offs. From 1996 to 2004, the trends in the responses of all households showed a moderate but sustained decline in choosing to save or invest a windfall (73% to 66%), an essentially flat line (varying within a narrow range) for choosing to pay off debt (63% to 62%), and a fairly sharp upturn in choosing to spend it on "something the household wants or needs" (35% to 42%). These trends suggest that U.S. consumers have been in a period of growing financial disengagement—a notion that is supported by numerous behavioral trends. In 2006, the only change in the response trends is a fairly sharp decline in the choice to spend the windfall (42% to 36%). Not surprisingly, household affluence plays a roll in responses. When we examine the trends in responses for households that we consider to be nonaffluent (total income of less than $100,000 and total assets minus the value of the home of less than $500,000), the picture is the same as that for the overall household population. When we examine the responses of affluent households, however, we see a growing inclination to pay off debt. Because the urge to spend excess funds has waned since 2004 for all three sets of households that we examined, and although numerous signals indicate that the economy is in good health and the equities markets are on a positive track, a declaration that the psyche of the American household has fully healed from the events of the past six years may be premature.

Figure 2: What Households Would Do with a $25,000 Windfall Figure 3: What Nonaffluent Households Would Do with a $25,000 Windfall Figure 4: What Affluent Households Would Do with a $25,000 Windfall

Banks Showing Signs of Organic Growth

In 2006, CFD published a marketing report, Why Banks Should Win the Organic-Growth Wars. A first peek into the 2006–07 MacroMonitor data reveals that depository institutions are indeed making strides toward organic growth by diversifying their product sets and increasingly selling what are traditionally brokerage products. In the past two years, depositories have shown modest growth in the number of households holding traditional banking products such as checking and savings accounts: 3.8% and 6.5%, respectively. Where banks have really improved by leaps and bounds is in household penetration of stock and bond mutual funds, money market mutual funds, and salary-reduction plans. In 2006, 72.3% more households own a money market mutual fund at a depository institution than in 2004, compared to 8.9% growth at investment institutions. The number of households that hold stock mutual funds at a depository institution has grown 64.6% in this two-year period, from 8 million to 13.2 million, and the number owning bond mutual funds has grown 68.8%, from 4.6 million to 7.8 million. Meanwhile, growth at investment institutions has been 16.5% for stock mutual funds and 20.4% for bond mutual funds.

Figure 5: Growth in Penetration of Various Investments, by Institution (2004–06)