The Federal Reserve Bank of New York just released its latest quarterly report on household debt and credit. Long story short, Americans love leverage as much as ever. Household debt balances increased by $212 billion in the fourth quarter of 2023 up to $17.50 trillion. Balances have increased $3.4 trillion since the end of 2019, right before the Covid pandemic, an increase of 24%.
Some readers might see these figures and be alarmed, because they sound like massive liabilities. Others, tired of hearing about the federal government’s $34.3 trillion debt, might brush it off. The question to ask is, what does the $17.5 trillion household debt tell us about U.S. consumers?
With a strong economy and continued low unemployment, Americans appear to be more and more comfortable carrying debt. The largest factor, mortgages at $12.25 trillion, are a symptom of the COVID housing boom, which has slowed down, but not retreated.
Consumers are continuing to use credit cards (credit card balances increased to $1.13 trillion outstanding) and 8.5% of credit card balances transitioned into delinquency. Car buyers are still heavily leaning on auto financing (auto loans total $1.61 trillion) and 15% of auto loans in the 4th quarter were to borrowers with credit scores below 620.
Both of these stats suggest that consumers are not just comfortable with debt, but also still stretching to keep up with inflation (the latest CPI report showed inflation growing 3.1% over the past year). Student loan balances did not change much, still hovering around $1.6 trillion. This may be due in part to loan forgiveness programs such as Public Service Lona Forgiveness kicking in.
The Fed has signaled that they may cut rates later this year. However, if interest rates remain high for longer, which is possible amid a strong economy and stock market at record highs, growing debt servicing costs would harm consumers’ budgets. Lingering high rates could cause a savings shortfall. If consumers' earnings do not outpace their debt acquisition and costs of borrowing, they'll realize a greater household deficit.
New homeowners may have taken on a higher interest rate in 2023 or early 2024 with plans of quickly refinancing their mortgage when rates drop, but if rates stay higher for longer this can have a trickle affect on the rest of their budget.
Credit card and auto loan delinquencies could also rise further. Not only would households spend more on debt and save less, but they may also be investing less, creating a greater lost opportunity cost if the markets continue to flourish.
Are Americans borrowing too much? There are some signals that indicate the chance of a slowdown. Outstanding credit card debt grew, but at a slower rate than prior quarters. If consumers would borrow less it would likely create a more comfortable household financial plan.
However, less borrowing generally means less liquidity flowing through the economy and less economic expansion. If GDP remains strong, unemployment low, and there are rate cuts, one could expect debt acquisition to continue at a steady or even higher rate, but hopefully in conjunction with existing debt paydown amid lower borrowing costs.
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Bryan M. Kuderna is a Certified Financial Planner™ and the founder of Kuderna Financial Team, a New Jersey-based financial services firm. He is the host of The Kuderna Podcast and author of ,"WHAT SHOULD I DO WITH MY MONEY?: Economic Insights to Build Wealth Amid Chaos".