The Household Debt and Credit Report from the FRBNY for the fourth quarter of 2023 was released yesterday. Total household debt increased by $212 billion to $17.50 trillion, driven by a $112 billion increase in mortgage debt, a $50 billion increase in credit card debt, and a $50 billion increase from all other categories combined. Delinquency rates across all categories except student loans accelerated. At the same time, we are seeing commercial bank lending to consumers continue to decelerate on a rate of change basis. This dynamic will likely have implications for consumer spending and ultimately, the path of economic activity moving forward.
Source: Macrobond.
On an absolute basis, mortgage debt makes up the bulk of total household debt at $12.30 trillion (70% of total), followed by auto loans at $1.61 trillion (9.2%), student loans at $1.60 trillion (9.2%), credit cards at $1.13 trillion (6.5%), ‘other’ (includes personal loans, sales financing, and retail-related loans) at $554 billion (3.2%), and home equity lines of credit at $360 billion (2.1%).
Source: Macrobond.
On a year-over-year basis, the total debt balance increased by $604 billion, led by a $329 billion increase in mortgage debt. Underneath that, credit card debt increased by $143 billion, accounting for 25% of the twelve-month change in total debt, up from 19.6% in the prior quarter and its largest share of total debt growth since 2001. The quarterly rate of change in the year-over-year change in each category slowed in the fourth quarter, except for the ‘other’ category which increased by $47 billion year-over-year, up from $38 billion in the prior period. The ‘other’ category has had seven consecutive quarters beginning in 2Q22 that surpass any twelve-month change seen in the last two decades. From the consumer’s perspective, if credit conditions were improving and consumers were willing/able to continue spending on credit we would expect these balances to stop declining in 2024.
Source: Macrobond.
Turning to delinquency rates, there was a broad-based acceleration on a 30-day and 90-day basis, particularly in credit cards, ‘other’, and auto loans. For the fourth quarter, 30-day delinquency rates for credit cards increased to 6.36 from 5.78 in the prior period and 90-day delinquency rates increased to 8.52 from 8.01. Auto loan delinquency rates increased to 7.69 from 7.39 for the 30-day bucket and to 2.66 from 2.53 for the 90-day bucket. The ‘other’ category saw 30-day delinquency rates increase to 7.50 from 7.25 and to 5.15 from 4.96 on a 90-day basis. If consumer earnings improve in 2024, we would expect to see delinquency rates move in the other direction.
Source: Macrobond.
As delinquencies rise and the cost of funding increases, lenders’ willingness and ability to continue providing credit could become impaired. From a lender’s perspective (are they willing/able to continue lending), we would expect to see a reversal in the current trajectory of H.8 data from the Federal Reserve, which has been steadily decelerating year-over-year. An important takeaway from this setup is the impact that decelerating loan growth will have on delinquency rates. As banks’ consumer loan books contract, there will be less new loans in the total loan pool, leading to an increase in delinquency rates.
Source: Macrobond.
While credit use remains near record highs on an absolute basis, the rate of change slowdown in balances and banks’ consumer lending activity coupled with an acceleration in delinquency rates suggests we are moving into a weakening credit environment. We will continue to monitor consumer credit growth and bank lending activity for insight into the consumer spending setup as it will likely have broader implications for economic growth and inflation moving forward.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Investment Strategist
Boyd Watterson Asset Management, LLC