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 $13.86 trillion at the end of the second quarter of 2019. That was a $192 billion (1.4 percent) increase from Q1 2019 and the 20th quarterly gain in a row. On the state level, California in Q2 once again had 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 $1.18 trillion (9.3 percent) above the 2008 peak.
Rising mortgage, automobile, and student loan debt have all been big drivers of this uptrend but encouragingly only 4.4 percent of the total debt outstanding was in some stage of delinquency at the end of June. That was down from the previous quarter and well below the level seen during the last recession. Further, 232,000 consumers had a bankruptcy notation on their credit reports in Q2, an increase from the prior quarter but still near the low-end of the historic range. Altogether this suggests that even though total household debt in America has surpassed the 2008 high, the quality of that debt has vastly improved. Moreover, flows into both newly delinquent (at least 30 days past due) and seriously delinquent (90+ days late) status have in most areas stabilized or even declined over the past few years. Credit cards are a clear exception, which agrees with the earlier slowdown in revolving credit utilization, but demand has firmed recently as current conditions are still much better than what was seen ahead of the last recession.
Assuming the labor market continues to tighten, the resulting pickup in wage growth could help consumers pay down their debt at a faster rate, and ultimately 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, eliminating 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 Americans ages 60 and older still owed around $3.32 trillion in Q2, with 16 percent of this debt consisting of automobile loans and credit card balances. Perhaps an even better deterrent against excessive borrowing is an earlier study by the Federal Reserve Bank of Atlanta, which found that worsening creditworthiness and increases in severely delinquent debt lead to higher individual mortality risk.
Sources: FRBNY, FRBA
Post author: Charles Couch