At first blush, Canada's latest household-balance-sheet statistics suggest that Canadians may already be falling off their much-needed debt diet. But we may have seen nothing more than a seasonal bump on the path to healthier consumer debt.
Last week, Statistics Canada reported that a key measure of consumer debt load, the ratio of household debt to disposable income, rose to 163.6 per cent in the second quarter from 163.1 per cent in the first quarter. The increase, while hardly huge, came after the closely watched ratio had declined two quarters in a row from its record peak of 164.1 per cent in the 2013 third quarter. The immediate concern was that after smartening up and pulling themselves out of unprecedented depths in recent months, Canadians were already growing complacent and slipping back into the debt quicksand.
But Statscan's household-balance-sheet reports lack something pretty meaningful: They aren't adjusted for seasonal differences. Canadian Imperial Bank of Commerce senior economist Peter Buchanan crunched some numbers (and was kind enough to supply them to The Globe and Mail), and found that Canada's household-debt-to-disposable-income ratio is always up in the second quarter. In the nearly quarter-century of data that Statscan has collected on this, the ratio has never had declined from the first quarter to the second. And most of history's biggest quarter-to-quarter jumps in the ratio have come in the second quarter.
"Late spring is ordinarily a strong period for home and auto sales, so people typically take on a fair bit of debt," he said in an e-mail. "You have to seasonally adjust data to get a true picture."
Mr. Buchanan smoothed the data for seasonal quirks, and found that the seasonally adjusted debt-to-disposable-income ratio actually peaked in the 2014 first quarter – and declined in the second quarter, to 163.6 per cent. That's the first seasonally adjusted decline in any quarter since 2006.
We have already seen evidence that debt accumulation has slowed; on a year-over-year basis, household debt grew at just 4.1 per cent in the second quarter, the slowest pace in 13 years. The debt-to-net-worth ratio is at an eight-year low. Yet this the first time in this consumer-debt-retrenching phase that, after adjusting for seasonal quirks, the debt-to-disposable-income measure is actually down.
"The seasonally adjusted data reinforce view that Canadian debt levels have likely peaked – though we're not seeing the same sharp reduction in the burden as south of the border," Mr. Buchanan said.
U.S. households have whittled their debt-to-disposable-income ratio down from nearly 130 per cent before the financial crisis to just over 100 per cent today. The Canadian and U.S. ratios are calculated differently and therefore aren't really comparable, but certainly in terms of trend, U.S. consumer debt loads have been shrinking while Canadians' burdens have merely flattened.
Maybe we're focusing too much attention on debt-to-disposable-income anyway. The Bank of Canada, which has long been concerned about Canadians' "household imbalances" (as it likes to call them), has itself acknowledged that the measure is overrated.
"In terms of their financial health, the critical issue is not the level of debt, but whether they have difficulty servicing that debt," the central bank said in its backgrounder paper on household debt. "In this sense, the debt-service ratio, which measures a household's debt-servicing costs as a percentage of its disposable income, is a better indicator of financial stress than the aggregate debt-to-income ratio."
And what is Canada's debt service ratio? A mere 6.9 per cent in the second quarter, its lowest on record and down from more than 9 per cent before the recession. This alone is good reason to think that the central bank, far from being concerned about the second-quarter household debt numbers, may finally be seeing a little more light at the end of its long consumer-debt tunnel.
David Parkinson