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Consumer Debt Fears

A man getting hit with a heavy metal ball representing debt.

Every bull market has a wall of worry that never stops until euphoria sets in toward the end of the bull market. Usually, it is a mix of long-running fears like consumer credit card debt and newfound fears like the Magnificent Seven or AI. This month, Q4 2023, credit card debt figures came in at an all-time high value, over $1.13 trillion. Yes, this is a considerable number, but we need to look at it compared to other factors to learn whether it is a viable concern.

Recently, headlines bemoaned credit card and auto loan delinquency rates rising based on the Federal Reserve Bank of New York’s Q4 2023 data. To analyze if consumer debt is a problem at this level or is a repeated fear, let’s start by digging into the data. The numbers show aggregate US household debt balances increased by $212 billion in the fourth quarter of 2023, a 1.2% rise from Q3 2023. Balances now stand at $17.50 trillion and have increased by ~$3.4 trillion since the end of 2019, just before the pandemic recession.

Unfortunately, this report avoids telling us if household finances are weakening because we cannot compare the debt to assets because Q4 2023 household asset data is not available yet. Oddly, the Federal Reserve Bank of New York publishes the household asset data at a lag to the household debt data, so side-by-side comparisons cannot be quickly completed. So, let’s compare the Federal Reserve Bank of New York Household Assets to Household Debt between Q4 2019 and Q3 2023 and see if a dour trend has evolved.

Nope, the figures below show the percentage of debt growth is less than the increase in asset growth from Q4 2019 through Q3 2023.

US Household Total Assets ending Q4 2019:$125.61 trillion
US Household Total Assets ending Q3 2023:$161.38 trillion
US Household Debt ending Q4 2019:$14.15 trillion
US Household Debt ending Q3 2023:$17.29 trillion

It is reasonable to acknowledge that the recent rate increases put pressure on some households. Still, the broader picture suggests US household debt isn’t broadly a problem. Clearly, these are broad totals with skew, so not every household’s experience matches this comparison exactly, which is true of any cumulative statistic. But the trend shows us that fundamentals are more robust than headlines imply.

Furthermore, when you review all debt (mortgages, home equity lines, student debt, autos, etc.), the 90+ day delinquency rate is currently 1.42%, well below the 3.83% average rate since this data series launched in 2003. This historical context lets us acknowledge that debt rose in Q4 2023 yet is meaningfully below longer-term averages and the highs from the aftermath of the 2007-2009 recession. Previous high debt levels were legacies of the massive recession, not the cause, and there was no consumer debt crisis in the early 2010s. Instead, delinquencies fell gradually as the economy grew, lifting incomes and helping household finances improve. A similar scenario is also the likeliest today.

In closing, with inflation easing, wages still rising, and household debt not being a concern when correctly viewed, the reality is better than what fear-mongering headlines state. More importantly, this data is backward-looking and does not predict future economic conditions, which helps remind us that the fear of a false factor is bullish.

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