U.S. consumer debt has hit a new record, but lenders shouldn't be spooked

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You may see a few headlines in the next 24 hours lamenting the fact that U.S. household debt has climbed back to its pre-financial-crisis peak.

But don’t cue the scary music. The bad old days of 2008 are not back. Many U.S. consumers are indeed struggling to manage their debts, but there is no reason for most lenders to panic.

Let’s look at the data.

Total household debt in the United States reached $12.73 trillion in the first quarter, its highest level ever, according to a report released Wednesday by the Federal Reserve Bank of New York. The previous peak of $12.68 trillion came at the end of the third quarter of 2008, just before the worst recession in three generations.

Those are big numbers, even in the context of the massive U.S. economy.

“Consumer spending makes up about 70% of all economic activity. Much of that spending requires practical and sustainable methods of financing,” Consumer Financial Protection Bureau Director Richard Cordray noted in a speech late last year.

But there are a couple of crucial asterisks here that the New York Fed points out.

First, the New York Fed’s data is not adjusted for inflation, and prices of goods and services have climbed by 11% since September 2008, according to the consumer price index.

Second, the data released Wednesday on total household debt does not take into account population growth. Between 2008 and 2017, the U.S. population grew by almost 7%. The New York Fed found that per-capita consumer debt was $47,600 in the first quarter of 2017, which was down from $53,000 in the third quarter of 2008.

So the data looks less ominous once adjustments are made for inflation and population growth. Perhaps what is most remarkable about Wednesday’s milestone is that it took close to nine years to happen.

The New York Fed has estimated U.S. consumer debt all the way back to 1945, and the 2008 to 2013 period is by far the biggest downward spike in an otherwise relentless upward climb.

And there’s another upbeat sign. The economic upheaval of the Great Recession was closely linked to the mortgage market, and there is far less reason today to worry about that particular segment of the consumer finance industry.

U.S. mortgage debt stood at $8.63 trillion at the end of the first quarter, a 7% decline from its 2008 peak. Meanwhile, nationwide housing prices have risen by 14.6% over the last nine years, according to the S&P CoreLogic Case-Shiller index. Taken together, those numbers suggest that homeowners have far more equity in their houses now than they did in 2008.

This is not to say to that everything looks rosy. Rising student debt is perhaps the biggest cause for concern, as the $1.34 trillion in education debt outstanding at the end of the first quarter was more than double the level in 2008. Nearly 11% of all student loans were classified as 90 days or more delinquent, up from roughly 7.5% just before the crisis.

And while the amount of mortgage debt outstanding has fallen since 2008, the rise in student debt has roughly offset that decrease, according to the New York Fed.

In an April speech, New York Fed President William Dudley said that Americans with significant student debt are much less likely to own a home at any given age than those who completed their education with little or no debt. “For a large share of households, housing equity is a principal form of wealth,” he noted.

Another cause for concern is that while affluent borrowers are flexing their strength, consumers with marred credit are having a harder time juggling their various debt obligations. The growing weakness among subprime borrowers is becoming apparent in the auto loan and credit card markets.

For lenders, the worry is that loans to borrowers with low credit scores will perform worse in 2017 than they would have a few years ago, since those borrowers have taken on more debt, and their incomes have not kept pace.

Still, the picture painted Wednesday by the New York Fed is generally reassuring. In the first quarter, only 4.8% of all consumer loans were 30 days or more past due, compared with 8.5% in the third quarter of 2008. That number peaked at 11.9% in the fourth quarter of 2009.

“The household sector’s financial condition today is in unusually good shape for this point in an economic cycle,” Dudley said in his April speech.

“In relative terms, household indebtedness is low, and — thanks in part to low interest rates — debt service burdens relative to household income have fallen to levels not seen since at least the early 1980s.”

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Consumer lending Mortgages Auto lending Student loans Economy Credit cards William Dudley Richard Cordray Federal Reserve Bank of New York CFPB