U.S. Household Debt Up $552 billion This Year

TERESA READ

On Tuesday, the Federal Reserve Bank of New York reported that the total U.S. household debt was $12.84 trillion for the second quarter, a record high and up $552 billion from a year ago. This rise in consumer debt continues to exceed the pre-crisis peak of 2008. While that trend may sound alarming, it is important to note that there are fewer delinquencies now than at the time of the financial crisis. Currently, 4.8% of debt is delinquent, compared to 8.5% in 2008. In additions, a comparison of the same time frames shows fewer bankruptcy filings in 2017.

The report points out that economic expansion in the U.S. has become increasingly dependent on the growth of credit. Therefore, any slowdown in borrowing now has a greater dampening effect on GDP. Consumer credit is a good indicator of the potential future spending levels seen in retail sales and shows the extent to which benchmark interest rates.

The data released earlier this week shows mortgage debt was $8.69 trillion in the second quarter, up $329 billion from last year. Student loan debt was $1.34 trillion, up $85 billion, and auto loan debt came in at $1.19 trillion, up $55 billion.

Increasing obligation at these levels might appear to be negative and a sign of scary times ahead. However, it also may be positive – fuel for the growing economy. The question of most Americans is whether the economy can hold up under this massive growth in debt. The answer is in the details of the data, so let’s peel back this onion.

There are six underlying components to consumer debt. The best way to examine each section is to look at them as a percentage based on absolute dollars, taking into effect inflation and population growth. Below is a chart that shows the growth of each sector at three distinct points in time:

More risk lies with home mortgages because of the magnitude, which grew at an accelerated rate between 2003 and 2008 but has remained relatively level since. The two sections that show the largest increase since 2008 are automobile and student loans. Because they are a small percentage of the overall debt, there would not be a significant impact on the overall U.S. economy if they were to fail.

Auto loans are showing some increased signs of distress as well; with various measures of delinquency slowly rising. This unfortunate trend is most recently due to lowering the credit requirement to 680, which is considered a subprime score.

Student loans are unique because they are backed by the government and cannot be charged off in bankruptcy, which means more Americans carry this massive debt that could weigh them down for many years, preventing them from buying homes or starting businesses.