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 $12.35 trillion in the third quarter of 2016, a $63 billion (0.5 percent) increase from Q2 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 2.6 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 4.9 percent of the total debt outstanding was in some stage of delinquency at the end of the third quarter, a slight increase from Q2 but still one of the lowest rates seen during the recovery.
There were also 213,000 consumers that had a bankruptcy notation added to their credit reports in the third quarter, 6 percent fewer than in Q3 2015. One thing to watch going forward, though, is the proportion of overall debt that becomes “newly delinquent,” which has been on a steady downward trend during most of the recovery but in recent quarters appears to have possibly bottomed-out. Further, even though the percentages of aggregate credit card and mortgage debt that are seriously delinquent (at least 90 days late) have generally declined since the recession ended, this has not been the case for student and automobile loans. For the latter, the report’s authors even noted seeing “significantly higher, and rising, delinquency rates among subprime auto loans” in Q3. As for education-related debt, student loan balances increased by $20 billion last quarter, and have risen on an annual basis in every year throughout the nearly 2-decade history of this data series.
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. However, even if non-revolving credit utilization continues to expand at a slower pace, it is still expanding. At the same time, growth in revolving credit, which is mostly consumers’ credit cards, has started to accelerate this year, especially among people with relatively low credit scores. Add to all of 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. Perhaps an even better deterrent against excessive borrowing is the new study by the Federal Reserve Bank of Atlanta (FRBA) which found that worsening creditworthiness and increases in severely delinquent debt lead to increases in individual mortality risk.
Sources: FRBNY, FRBG, WSJ, Bloomberg, FINRA, FRBAPost author: Charles Couch