Friday, November 29, 2013

Household Debt and Delinquency Levels and Their Impact on GDP Growth

The recent Quarterly Report on Household Debt and Credit from the New York Fed shows an interesting change in the trend of household debt in the United States.

Here is a graphic showing the total household debt balance, including both housing and non-housing debt for the third quarter of 2013:

On September 30, 2013, total consumer indebtedness was $11.28 trillion.  This is up 1.1 percent on a quarter-over-quarter basis, however, it is still 11 percent below the peak consumer debt level of $12.67 trillion in the third quarter of 2008.  That said, this is the largest increase in consumer debt seen since the first quarter of 2008 when the Great Recession was just an infant.  It is also important to note that the housing market was severely over-valued at the beginning of 2008, putting significant upward pressure on the dollar value of housing loans, a situation that does not exist in most real estate markets today.  This renders a comparison between the current total consumer indebtedness level and that seen in 2008 rather difficult. 

Here is a breakdown of the increases by type of debt:

Mortgage debt: increased by 0.7 percent to $8.43 trillion
Non-housing debt increased by 2.7 percent to $2.85 trillion

Of non-housing debt, auto loan balances increased by $31 billion, student loans increased by $33 billion and credit card balances increased by $4 billion.  Auto loans increased to $97.4 billion, the highest level since the third quarter of 2007.

Here is a bar graph showing the total debt balance and a breakdown of its composition:

Now, let's look at the delinquency status of household debt in the United States.  Here is a bar graph showing the percentage of loans broken down the degree of delinquency:

It is interesting to note that while the percentage of loans that are more than 30 days delinquent has dropped from its peak of 11.9 percent in the first quarter of 2010, at 7.4 percent, it is still nearly double the 3.5 to 5 percent range experienced prior to the Great Recession.   Of the total outstanding household debt, $831 billion is considered delinquent with $600 billion considered seriously delinquent (at least 90 days late).  Here is a graph showing the new delinquent balances by the type of loan:

For the first time since the end of 2012, the total balance of new delinquent loans grew, hitting nearly $200 billion.  You will also note that the total delinquent loan balance is still well above the pre-Great Recession level of between $135 billion and $150 billion.

Despite the improvement in the economy, about 355,000 consumers had a bankruptcy notation added to their credit reports, roughly the same number as the year before.  Here is a graph showing the number of consumers with new foreclosures (in blue) and new bankruptcies (in red):

I find it interesting that the number of new bankruptcies has not dropped significantly since the middle of 2011 and that it is still quite elevated compared to levels seen from early 2006 to mid-2007.

The Federal Reserve has been using its "printing presses" to get the economy running on all cylinders.  Consumer spending is key to economic growth in America.  As shown on this graph from FRED, personal consumption expenditures make up nearly 69 percent of GDP, a multi-decade high:

With interest rates sitting at all-time lows and household deleveraging well underway, consumers are now showing signs that they are willing to take on increasing levels of debt to increase their expenditures which have risen from a low of just over $9.8 trillion in late 2008 to their current level of $10.52 trillion as shown on this graph:

What I find interesting is that, as shown on this graph, personal consumption expenditures are outgrowing inflation by over 2 percentage points:

What concerns me is the still elevated level of household debt delinquencies.  With household debt levels now on the rise and the threat of interest rate increases looming, only time will tell whether tapering will put upward pressure on already high delinquency rates, forcing consumers to reduce their debt levels.  With nearly 70 percent of GDP stemming from consumer expenditures, any reduction in consumer spending for any reason will put further downward pressure on what is already anemic economic growth.

1 comment:

  1. A few thoughts, a tenant in one of my buildings is a bankruptcy lawyer her business is booming, we should not underestimate the role of bankruptcy in reducing and deleveraging household debt. Charts are sometimes hard to garner information from but the growth in student loans really stands out. Last but not least, much of this spending is created by QE and unsustainable deficit spending. The post below bangs away at these points.