Payments Ecosystem

US Household Debt Hits Record High: A Detailed Analysis

US household debt reached a record high with an increase of $184 billion, or 1.1%, from the last quarter, according to the Federal Reserve's latest quarterly report. Here are some key takeaways and insights from the data:

Debt Overview:

• Total US Household Debt: $17.7 trillion, with consumers adding nearly $4 trillion since the pandemic.
• Debt Breakdown:
  • Mortgages: $12.4 trillion
  • Home Equity Loans: $0.38 trillion
  • Student Loans: $1.7 trillion
  • Credit Card Debt: $1.2 trillion
  • Auto Loans: $1.6 trillion

Delinquency Rates:

• 3.2% of total debt is in some stage of delinquency.
• Credit card delinquency rates are at 9%.
• Auto loan delinquencies are at 8% on an annualized basis.

Economic Concerns: While the stock market has reacted positively to signs of slowing inflation in the CPI report this week, underlying economic activity remains a concern. Higher interest rates are expected to persist until at least November, with a potential reduction in September only if CPI continues to show a decline for the next three months.

Banking Sector Implications: Banks are likely to see increased activity in several areas:

• Home Equity Loans: Increased by $16 billion this quarter, marking the largest rise since 2008. Consumers are leveraging these funds for various purposes despite higher interest rates.
• Auto Loans: Delinquencies are rising, with the average payment now at $738. Currently, 3 million car loans are delinquent, and 2.8% of loans are 90 days or more past due.
• Credit Card Debt: The rate of credit card debt transitioning to 90+ days delinquent has reached 6.9%, with younger cardholders (aged 18 to 29) experiencing a higher rate of 9.9%.

Consumer Struggles: Inflation, particularly in food and rent, coupled with high interest rates, is creating significant financial strain for consumers. This is leading to increased reliance on credit cards and home equity loans for those who own homes. Buy Now, Pay Later (BNPL) services are also contributing to the debt burden, with 43% of BNPL users behind on payments.

Bank Fees and Bankruptcies: Despite consumer struggles, banks continue to benefit from non-interest income through late fees, with 121,000 bankruptcy notations recorded this quarter and 4.8% of consumer debt in third-party collections.

Looking Ahead: The past three months' data highlights the economic challenges consumers face. Banks will need to reassess risk management and policy measures to protect against rising credit lines with fewer delinquencies. Additionally, they must consider the broader picture of their commercial real estate (CRE) exposure, with close to $1 trillion in loans maturing this year.

This report underscores the need for vigilant financial strategies as both consumers and financial institutions navigate these challenging economic times.

Today's news of 2023 GDP at 3.1% has a strong component of consumer spending embedded to fuel further conversation around the sate of the economy in 2024, gyrating between soft landing to growth! While 2023 numbers had most economists reflecting back on how different 2024 turned out from their prediction models - the Fed policy at least for now seems to be effective with a waning inflation rate. 

Consumer card spending in 2023 rose by ~$525B with a 'B' to $2.25T since 2019 for top 4 banks with JPM, and BofA raking high single digits and WF spending was up 15%. 

There are underlying concerns in these numbers:

- 30+ days delinquency numbers have risen consistently over past 8 quarters to the highest levels now

- Card loan balances have exceeded the 2019 level by ~$525B

- BNPL will have some contribution to the overall spending volume on cards

- Consumer deposits have fallen across all 4 banks

From a consumer dynamic perspective there has been heavy spending during holidays, disposable income has reduced even though wages have risen, student loans pause in payments has now been lifted, insurance for homes & cars have risen, and even though inflation is slowing - the consumers will not end-up having the same prices that existed 3 years ago requiring them to budget differently to the new reality. 

On the plus side the banks so far have not provisioned for higher than usual delinquencies, wages improved, employment levels are good, consumer confidence is higher, and GPD continues to show expansion during a election year. 

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