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 $12.58 trillion in the fourth quarter of 2016, a $226 billion (1.8 percent) jump from Q3, and the highest reading in more than half a decade. California ended 2016 as the state with 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 just 0.8 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 fourth quarter of 2016, a slight increase from Q3 but still one of the lowest readings seen during the recovery.
There were also 204,000 consumers that had a bankruptcy notation added to their credit reports last quarter, 4 percent fewer than in Q4 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. For example, car loans delinquent by 30 days or more grew to $23.27 billion in Q4, the most since Q3 2008. As delinquencies have ticked up, many lenders have also started to tighten their credit standards, albeit modestly. The latest Senior Loan Officer Opinion survey from the Federal Reserve, for instance, showed that only a net 3.1 percent of bank respondents reported being more willing to make consumer installment loans in the fourth quarter of 2016, down sharply from 12.5 percent in Q3. Further, a net 8.3 percent of banks reported tightening standards for credit cards in Q4, the first such occurrence since 2010. Similar tightening was reported in the auto lending arena, with surveyed banks saying that they expect this trend to continue in 2017. However, most banks anticipate to ease lending standards for mortgage loans this year, likely a response to rising interest rates.
Despite the apparent shift in banks’ eagerness to lend, borrowing limits have now increased for sixteen consecutive quarters. Moreover, the total number of credit card accounts in America continued to rise in Q4, with aggregate balances growing at the fastest pace since 2008. Such 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. 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 a report from the Financial Industry Regulatory Authority (FINRA) showed, 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 a 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, Wells Fargo, ZH, Bloomberg, FINRA, FRBAPost author: Charles Couch