Exhibit 63: Non-Financial Corporate Sector Debt Service Ratio
Exhibit 64: Household Sector Debt Service Ratio
Households’ debt service ratio would remain low even with higher rates.
The debt-servicing burden of corporations is at its lowest in over 40 years. % of Income Debt Service Ratio 50
+50 bps Rate Shock
+100 bps Rate Shock
% of Disposable Income Debt Service Ratio
+50 bps Rate Shock
15
14 40
33.4 Q4 2008
+100 bps Rate Shock
12.8 Q4 2007
13 12
30 11 10
20 13.1 12.6 11.7
10 1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020
2024
9.4 9.3 9.2
9 8 1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020
2024
Data through Q3 2021. Note: Shaded periods denote recessions. Source: Investment Strategy Group, Federal Reserve, Haver.
Data through Q3 2021. Note: Shaded periods denote recessions. Source: Investment Strategy Group, Federal Reserve, Haver.
and corporations, lead to higher defaults and widen credit spreads. We believe that concern is misplaced. As shown in Exhibit 63, the debtservicing burden of non-financial corporates is at the lowest it has been in over 40 years. An increase of 50 basis points in 2022 would raise the ratio of net interest expense to earnings before interest and taxes from 11.7% to 12.6%. An additional 50 basis points would increase the debt service burden to 13.1%. Most of corporate debt is fixed and the weighted average maturity of that debt is over 10 years. Exhibit 64 shows a similarly muted impact for households. The ratio for households is measured as the ratio of debt service payments for mortgages and consumer debt to disposable personal income. A 50-basis-point increase in interest rates raises the debt service ratio from 9.2% to 9.3%, and a 100-basis-point increase in rates raises the debt service ratio to 9.4%. None of these increases in the interest burden raises the likelihood of a recession.
Russia-Ukraine crisis “the most dangerous, dire and imminent of all the geopolitical risks.”22 Russia has amassed over 50 battalion tactical groups compared to eight such groups in 2014 when it seized Crimea, and it has positioned an estimated 100,000 troops near Ukraine.23 Russia has used the threat of an attack on Ukraine to make a series of demands, the most important of which are:
Geopolitical Risks
We expect Russia and Iran to be the two most likely sources of geopolitical risks in 2022. Russia: Former Secretary of Defense Ashton Carter, with whom we consult on geopolitical and international security issues, considers the Outlook
Investment Strategy Group
For Russia, the benefits of a military invasion of eastern Ukraine are limited, and the price of economic sanctions could be high.
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