The latest update on Americans’ debt and credit developments from the Federal Reserve Bank of New York (FRBNY) showed that total U.S. household indebtedness was $13.15 trillion at the end of the fourth quarter of 2017. That was a $193 billion (1.5 percent) gain from Q3 and the 14th quarterly increase in a row. On the state level, California in Q4 once again had the highest total debt balance per capita.
Although the “Great Recession” officially ended in 2009, most Americans have stopped deleveraging only during the past few years. Still, the recent rebound has been considerable because overall household indebtedness is now $473 billion above the 2008 peak. Rising mortgage, automobile, and student loan debt have all been big drivers of this uptrend but encouragingly only 4.7 percent of the total debt outstanding was in some stage of delinquency at the end of December. That was down from the previous quarter and one of the lowest readings seen during the current economic cycle.
Altogether this suggests that even though total household debt in America has surpassed the 2008 high, the quality of that debt has vastly improved. For example, there were 200,000 consumers that had a bankruptcy notation added to their credit reports last quarter, a nearly 4 percent decline from Q3, and the proportion of overall debt becoming “newly delinquent” has been on a downward path during most of the recovery. In recent years, though, the latter appears to have bottomed-out, and car loans have been a major factor behind this trend shift. Credit card balance flows into both early and serious delinquencies have also started to pick up, albeit slightly.
At the same time, several banks have reportedly tightened their lending standards for certain types of consumer loans, according to the latest Senior Loan Officer Opinion survey from the Federal Reserve, including a modest net share of banks that have increased their minimum required credit score for credit card loans. However, even if some banks have become less eager to lend, borrowing limits in general have still increased for twenty consecutive quarters (+1.0 percent in Q4 alone). Moreover, the total number of credit card accounts in America continues to rise, and aggregate balances are growing at one of the fastest rates of the expansion.
Such activity can sometimes be an encouraging sign of consumers’ increased confidence in their personal finances, usually helped by a tightening labor market that is supportive of wage growth (future earning power). On the other hand, Americans must be careful not to overdo it with their increased appetite for debt because a spike in leverage can often be a recessionary precursor. What is worse is that most borrowers likely anticipate that they will be able to eliminate all of their financial obligations in a reasonable timeframe but as we learned earlier last year, too many Americans carry substantial debt into retirement.
Sources: FRBNY, FRBGPost author: Charles Couch