The latest report on Americans’ debt and credit developments from the Federal Reserve Bank of New York (FRBNY) showed that total U.S. household indebtedness was $12.29 trillion in the second quarter of 2016, a $35 billion (0.3 percent) increase from Q1 and the highest reading in more than half a decade. 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 just 3.1 percent below the 2008 peak of $12.68 trillion. Rising mortgage, automobile, and student loan debt have all been big drivers of this uptrend but encouragingly only 4.8 percent of the total debt outstanding was in some stage of delinquency at the end of the second quarter, the lowest rate of the recovery.
In fact, the proportion of overall debt that becomes “newly delinquent” has been on a steady downward trend during the recovery and in Q2 ended near the lowest level since this FRBNY data series began. Further, 224,000 consumers had a bankruptcy notation added to their credit reports in the second quarter, 15 percent fewer than in Q2 2015. The percentages of aggregate credit card and mortgage debt that are seriously delinquent (at least 90 days late) have also steadily declined since the recession ended but the opposite has occurred for student and automobile loans. Specifically, 11.1 percent of aggregate student loan debt was 90+ days delinquent or in default at the end of last quarter, one of the highest readings on record, and 3.5 percent of auto loan balances were seriously delinquent, the third year in a row of essentially no improvement.
These two components have also been the main drivers of the expansion in consumers’ credit utilization during the recovery but their overall pace of growth has showed signs of losing momentum recently. For example, total U.S. student loan debt outstanding posted its first quarterly decline ever in Q2. At the same time, growth in revolving credit, which is mostly consumers’ credit cards, has started to accelerate somewhat, especially among people with relatively low credit scores. However, even if non-revolving credit utilization continues to expand at a slower pace, it is still expanding. Add to this the uptick in the number of credit inquiries last quarter, an indicator of consumer credit demand, and it seems clear that Americans are becoming more willing to take on additional debt.
This behavior 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. 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. Further, most borrowers likely anticipate that they will be able to eliminate all of their financial obligations in a reasonable timeframe but as a report from the Financial Industry Regulatory Authority (FINRA) found, not even a quarter (23 percent) of surveyed retirees said that they are currently debt free.
Sources: FRBNY, FRBG, FINRAPost author: Charles Couch