The latest update on Americans’ debt and credit developments from the Federal Reserve Bank of New York showed that total U.S. household indebtedness was $14.56 trillion at the end of the fourth quarter of 2020, a new all-time high. On the state level, California as usual had the highest total debt balance per capita. Rising mortgage, automobile, and student loan debt have all been big drivers of the multi-year re-leveraging trend but encouragingly only 3.2 percent of the total debt outstanding was in some stage of delinquency at the end of December. That was a record low and the number of foreclosures, bankruptcies, and general defaults also plunged last year. Many of the apparent improvements, though, have been inflated by various forbearance extensions and other crisis-related support measures. The best evidence of this is student loans which have seen transitions into newly delinquent status collapse as payment requirements have basically been put on hold until H2 2021 at the earliest. Credit card companies have typically not provided such relief this crisis but even this arena experienced a sharp decline in delinquencies.
This supports our earlier suggestion that even though incoming retail sales figures are impressive, many Americans fortunate enough to stay employed throughout the COVID crisis have used a large portion of their $1200 and $600 relief checks and other disposable income not for discretionary spending but instead as a means to help pay down financial obligations. This is a normal response to heightened economic uncertainty, which likely peaked earlier last year during the lockdowns. Any further rebound in household debt could therefore be viewed (at least in part) as a reflection of increased confidence in the economic recovery in America, but hopefully households do not overdo it with the re-leveraging so that they can maintain their newfound balance sheet strength and in turn be better prepared for another crisis down the road. Moreover, as the labor market continues to recover the resulting pickup and broadening in wage growth could help more consumers pay down any remaining debt at a faster rate, and in turn have more disposable income to put to work in a tax-advantaged retirement account. Even for those who may not be able to immediately increase their 401(k) contributions, reducing debt would still put them on a significantly stronger financial footing in old age. Indeed, most borrowers likely anticipate that they will be able to pay off all of their financial obligations in a reasonable timeframe, but according to this data release Americans ages 60 and older still owed around $3.33 trillion in Q4, with 15.9 percent of this debt consisting of automobile loans and credit card balances.