Saturday, August 27, 2016

Debt Service Projection thru 2020

One more time.

I grabbed all three Debt Service series from FRED, the three that I know about anyway. Looking only at the years since the crisis: since 2008 on the graph. Blue is the total of red and green:

Graph #1: Measures of Debt Service
Where will Debt Service go next?

There's a little "V" just at the end of 2012 in all three lines on Graph #1. After the "V", from Q1 2013 to Q4 2015, the lines show little disturbance to the trend. I took those years after the "V", 12 data points on each line, and used them as a basis for trend lines in Excel.

I went looking for the highest R-squared values for different kinds of trend lines, and the sixth order polynomials were highest every time. So I went with that, but when I extended the trends out into the future, the numbers got crazy.

I guess the sixth order line had too many turns in it, and the data after the last turn determined the path of the trend line. Projecting TDSP for nine quarters, the trend line went to more than 100% of disposable income. That's crazy. Things are bad, but not that bad. Look how flat the blue line is on Graph #1, after the "V". There's no way this line will climb to 100 percent in two years.

So I did it again, using the second order polynomial trend, which I've used before. This time each trend line predicts a smooth continuation of actual recent data:

Graph #2: Debt Service 2013 thru 2015 with Trends thru 2020
There is no guarantee that recent trends will continue, of course. But if recent trends do continue, the actual data will look like what this graph shows.

By this measure, MDSP (debt service payments on mortgages) bottoms out in fourth quarter 2016. So if you've recently heard that new home sales surged 12.4 percent and existing home sales had four consecutive months of impressive increases , well, I guess mortgage debt service payments should start going up soon. Graph #2 seems to offer a reasonable forecast.

But it is hard to see much on Graph #2 because it only starts in 2013. So I backed up the start-date to 1980. Now we can see the debt service forecast in the context of actual experience:

Graph #3: Debt Service 1980 thru 2015 with Trends thru 2020
Consider just the blue debt service line and its future projection. We see a large bowl shape that runs from about 2008 to 2020. Let me put this in terms you'll understand:

  •  Most of the downtrend of that large bowl was President Obama's first term.
  •  The bottom of the bowl was most of Obama's second term.
  •  The black uptrend part of the bowl is the first term of our next President.

What does this mean? Hold that thought.

Again, consider the blue line. There is a smaller bowl shape from 1991 to 1995 in the blue line.

  •  In 1991 and 1992 we have the downtrend of the small bowl.
  •  In 1993 and early 1994 we have the bottom.
  •  In latter 1994 and 1995 we have the uptrend of the small bowl.

The 1991-92 downtrend is related to the recession that helped George H.W. Bush lose the Presidency to Bill Clinton. The bottom of the bowl was a period of debt relief. The 1994-95 uptrend is evidence of the increased credit use that brought vigor to the U.S. economy for the rest of the 1990s.

There is no guarantee, of course, that the uptrend in debt service which is starting now will stick to a trend that brings vigor to the economy the way the 1994-95 uptrend did. But hey: Our bowl had its downtrend in Obama's first term. Our bowl had its bottom in the endless, listless economy of Obama's second term. And now our bowl has the start of its uptrend.

I can see the uptrend. Excel can see the uptrend. And I think you can see it, too.

Oh, and the uptrend means vigor. That's what it means.

// the Excel file

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