U.S. Consumers Are Piling Up Debt, and That’s Fine

(Bloomberg Opinion) -- Consumer debt is rising in the U.S., and the reaction to this news has been both heated and predictable: “Americans in record debt: It’s our own fault,” read one headline in a conservative publication last week. A business website went with something more colorful: “The State of the American Debt Slaves, Q4 2019.” And presidential candidates have chimed in to express concern.

Here are some data points: Household debt has hit a record high, totaling $14.2 trillion in the fourth quarter of 2019. Overall last year, household debt balances increased by $601 billion, marking the largest annual increase since 2007. Households have been adding debt for 22 consecutive quarters.

Debt balances previously bottomed out in the second quarter of 2013. They are up 26.8% since then, and are 11.6% larger than their pre-Great Recession peak, set in the third quarter of 2008. Debt accumulated over the last quarter of 2019 through higher mortgage balances (up $120 billion from the previous quarter, to $9.6 trillion), auto loans, student loans and credit-card balances.

These data come from a report released last week by the Federal Reserve Bank of New York. Should we be worried about record-high household debt?

Three particular items have drawn attention. Credit-card delinquencies are on the rise. Consumers owe $930 billion on their credit cards, more than the pre-recession peak of $870 billion in 2008. The share of credit-card debt with payments more than 90 days late rose to its highest level since mid-2015, and the flow into delinquency is the highest since the first quarter of 2012. Borrowers between the ages of 18 and 29 have the highest rate of serious delinquency in a decade.

These totals are driven in part by reclassifying balances on some retail-store cards as credit-card debt. And some may reflect changes in lending standards rather than a deterioration in the ability of households — particularly younger households — to keep up with their bills. Still, it is something to keep an eye on.

The second item — student loan balances — is a subject of perennial national concern. The Fed data show these balances have been growing modestly, with a $51 billion increase over the year. This is down considerably from the $125 billion annual increase recorded in 2014, and may reflect a labor market attracting more people into work and out of school.

Third, debt rose in large part because mortgage and refinancing rates are so low. Loans to buy homes for 18- to 29-year-olds are at their highest level since 2007. With concern about low homeownership rates among younger people widespread, this is likely a good sign on the whole.

Beyond those particulars, a big takeaway from the Fed report is that households seem to be able to handle this much debt. Less than 5% of outstanding debt was delinquent in the fourth quarter of 2019, and 3.1% had payments more than 90 days behind. There is more delinquency than in the years leading up to the Great Recession, but not troublingly more. And households are in much better shape than in the fourth quarter of 2009, when 11.9% of debt was delinquent and 8.6% seriously so.

The Fed data match other macroeconomic indicators. Household balance sheets are in great shape, with the ratio of net worth to disposable income near its post-World War II high. And the personal savings rate stands at 7.6%, well above its low of 2.2% in July 2005. In addition, the average monthly savings rate has increased every year since 2016.

Indeed, the interesting question is why households are saving so much, not so little. In addition to strong balance sheets, the unemployment rate is at a half-century low. Median household income has surpassed its pre-Great Recession peak.

If anything, the share of income people save should be expected to fall during such a strong expansion, not increase, because households have less need for a buffer and should be less worried about the risk of unemployment. An aging population should be putting downward pressure on the rate, as well, since retirees spend down their savings.

Tighter credit standards could be pushing up the savings rate, and the Fed report shows that the median credit score of newly originated mortgages is up over the decade. The ballooning federal budget deficit during Donald Trump’s presidency is likely elevating the savings rate, as well, as households that receive tax cuts and benefit increases do not spend them in their entirety.

Psychological factors are likely at play, too. The trauma of the Great Recession may have increased the desire for savings.

Psychology is key to understanding the new data on household debt. Under certain circumstances, the economy could be pushed into recession because economic confidence could lead to recklessness and imprudent risk taking, which in turn could lead to macroeconomic imbalances. The current state of household debt, at first blush, might suggest the economy is headed in that direction.

But, if anything, U.S. households are still exercising more prudence than economic fundamentals suggest — even as they increase their borrowing.

To contact the editor responsible for this story: Katy Roberts at kroberts29@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”

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