Financial Planning, Retirement, Economy

An Update On U.S. Household Finances

6/1/16 8:00 AM

iStock_000005970521_Small.jpgThe 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 $12.25 trillion in the first quarter of 2016, a $136 billion (1.1 percent) increase from Q4 2015 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 3.3 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 5.0 percent of the total debt outstanding was in some stage of delinquency in Q1, the lowest rate recorded during the recovery. In fact, the proportion of overall debt that becomes “newly delinquent” has been on a steady downward trend and in Q1 ended at the lowest level since this FRBNY data series began in 1999.


Although debt expanded broadly in the first quarter, one area that declined was revolving credit. Specifically, the aggregate U.S. credit card limit increased for the 13th consecutive quarter but total credit card balances declined by $21 billion in Q1. Moreover, household credit card balances as a percentage of total available credit fell in the first three months of 2016 to 22.3 percent, the lowest reading on record. One potential interpretation of this is that U.S. households continue to drive economic growth without having to significantly lever up, and continued labor market tightening should allow more Americans to further improve their balance sheets. It also appears that despite consumers’ continued willingness to take on additional debt for big-ticket items, many households in the first quarter were still trying to cut back on discretionary spending and pay down their credit card balances. Using disposable income to reduce one’s outstanding credit card debt means that such funds are not being put into a retirement savings plan. However, such liability reduction improves household balance sheets and can therefore make it easier for these individuals to make more persistent contributions to a retirement plan in the future.



Sources: FRBNY, Consumer Credit Panel, Equifax, Bloomberg

Post author: Charles Couch