Mitch's Mailbox

September 5th, 2023

Consumer Debt Is Rising—Will It Be Like 2008?

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Will and Judith M. from Appleton, WI ask: Hi Mitch, we’ve been seeing some stories about rising debt levels for U.S. households. Credit cards, mortgages, student loans, etc. are all going way up, and we’re a bit worried about the impacts of mass defaults. Eerily reminds us of 2008. What’s your take? Thank you.

Mitch’s Response:

Thank you for sending in your question. There is much debate in macroeconomic circles about the health of the U.S. consumer and households. On one hand, retail spending has remained steady despite higher prices, and wages have gone up. On the other, we’re starting to see signs of strain on consumer finances in the form of rising delinquencies (i.e., being 30+ days late on a debt payment).1

The chart below shows the delinquency rate of single-family mortgages (purple), consumer loans (green), credit card loans (red), and all loans (blue). All loans include business loans, commercial real estate loans, and others, and can be viewed as an aggregate economic view of how loans are performing.

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Source: Federal Reserve Bank of St. Louis3

In my view, there’s a clear takeaway from the chart above: households are starting to feel some pressure in consumer loans and credit card loans, but mortgages (benefiting from low rates) and the broad economy are holding up well. The uptick in credit card, auto loan, and other consumer loan delinquencies is certainly worth keeping an eye on here. According to the Federal Reserve Bank of New York, the percentage of credit-card and auto-loan balances transitioning into delinquency is happening at a faster pace than we saw in 2019, which while noteworthy is also arguably not grounds for sounding the alarm. The economy was in good shape in 2019.

There are a few reasons I don’t think it’s time to worry just yet. The first is that the economy remains flush with jobs and wages are higher, both of which support household finances. The second is that bank account balances across various income groups in the U.S. are about 30% higher than they averaged in 2019, according to the Bank of America Institute. Even though inflation is eating into savings to a certain degree, households are also bringing home more income. A final factor to note is that a wide majority of U.S. homeowners are benefiting from the 10+ year period of ultralow interest rates, which followed the 2008 Global Financial Crisis and the 2020 pandemic. A majority of homeowners purchased or were able to refinance at low rates, which translates to relatively low mortgage payments. According to mortgage data firm Black Knight, the average monthly principal and interest payment for households was $1,355 in June, which is just 21% of median household income – near a record low.

One factor we’ll be watching this fall is the resumption of student loan payments, which are scheduled to resume in October. The impact of these monthly payments returning could mean less spending capacity for some households and also the possibility of falling behind on other payments, which could see the delinquency rate tick even higher. Time will tell, but I don’t think you need to be worried about a return to 2008.

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Disclosure

1 Wall Street Journal. August 16, 2023. https://www.wsj.com/personal-finance/is-it-time-to-worry-about-consumer-debt-what-is-going-on-in-seven-charts-d545f171

2 Zacks Investment Management reserves the right to amend the terms or rescind the free 4 Strategies for Spending Money in Retirement offer at any time and for any reason at its discretion.

3 Fred Economic Data. August 21, 2023. https://fred.stlouisfed.org/series/DRALACBS#

4 Zacks Investment Management reserves the right to amend the terms or rescind the free 4 Strategies for Spending Money in Retirement offer at any time and for any reason at its discretion.

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