Household Debt in Perspective

On Tuesday, the New York Fed dropped its Q1 Household Debt and Credit Report—a gauge garnering tons of attention with inflation running high in recent years. Many presume rising living costs are forcing ever-more households deeper into unserviceable hock—a narrative that reemerged this week. But the data don’t support the harangue. Here is how to see this—and why it is, in our view.

The report showed household debt continues making record highs. Q1 added $184 billion to consumer balances, taking the total to $17.69 trillion.^[i] That isn’t especially newsworthy, though, considering climbing debt levels are normal during economic expansions. But higher delinquency rates—particularly in credit cards—are raising eyebrows. Positively, credit card balances fell -$14 billion to $1.12 trillion, just 6% of the total. But the amount seriously delinquent (90+ days past due) rose a full percentage point to 10.7%, the highest since 2012, up from Q3 2022’s low of 7.6%.

No doubt some are facing distress—but importantly, households overall aren’t. As Exhibit 1 shows, credit cards’ share (dark blue) of seriously delinquent debt is increasing. But the aggregate serious delinquency rate ticked up to only 1.8% from Q4’s 1.7%, which isn’t exactly alarming. It is still well below the roughly 3% serious delinquency rates that prevailed prepandemic when the economy—and markets—were fine.

Exhibit 1: Households’ Delinquency Rate and Its Composition

Source: Federal Reserve Bank of New York, as of 5/14/2024. Quarterly Report on Household Debt and Credit: Percent of Balance 90+ Days Delinquent by Loan Type, Q1 2003 – Q1 2024.

Now, today’s historically low delinquencies are thanks partly to student loans’ pause under the emergency moratorium on payments, which have since resumed. And as the New York Fed notes: “Missed federal student loan payments will not be reported to credit bureaus until 2024 Q4.”^[ii] But with the Biden administration canceling about 9% of student loans, missed payments may not be as elevated when reporting restarts.^[iii] Even a surge to record-high 12% student loan delinquency rates would only return aggregate delinquencies back to prepandemic norms.

The key reason why delinquencies have stayed low overall? Incomes are up, allowing Americans to keep a handle on their debt, even at higher levels. Exhibit 2 is one of the best ways to see this. Household debt service as a percentage of disposable personal income (DPI, after-tax income) remains near its lowest on record. People may be taking on more debt, but their disposable income—in aggregate—more than services it.

Exhibit 2: Households’ Financial Load Historically Light

Source: Federal Reserve, as of 5/14/2024. Household Debt Service Ratio, Q1 1980 – Q4 2023.

More generally, many think inflation has taken a huge bite out of folks’ incomes in recent years, putting them in a precarious position. But again, while true for some, this isn’t the experience for Americans in aggregate. Exhibit 3 shows per capita income adjusted for inflation hovering near record highs—even without lockdown-related transfers (those 2020 and 2021 spikes)—and trending higher. 2022 may have felt like a recession when inflation spiked—tanking real DPI per capita—but incomes since have more than kept up. Not for everyone, of course. But households as a whole are staying ahead of inflation.

Exhibit 3: Real Disposable Personal Income Per Capita

Source: Federal Reserve Bank of St. Louis, as of 5/14/2024.

Still, some say this issue is generational. And younger folks—Gen Z, those between ages 18 and 29 face the biggest challenges. Fair enough, folks at the early end of that bracket are new to their working years—hence, likely lower on the income scale. That can make inflation extra straining, and resumed student debt payments add to the burden. We understand the challenges this may bring for those early in their careers. But markets are cold and care mostly about things at scale. As Exhibit 4 shows, 18 – 29 year olds hold the smallest amount of household debt at 6%, which limits the economic impact.

Exhibit 4: Households’ Debt Balances by Age

Source: Federal Reserve Bank of New York, as of 5/14/2024. Quarterly Report on Household Debt and Credit: Total Debt Balance by Age, Q1 2003 – Q1 2024.

And as Exhibit 5 shows, while they are transitioning into serious delinquency at rates higher than older demographics, they still aren’t falling behind as fast as you might expect. That holds for both total debt and one of the main bugaboos, credit cards. That could change, of course. But given the history, a rise in younger folks’ overall delinquency rates from relatively low levels currently doesn’t automatically mean big problems economy-wide or rule out the generation having a successful financial future longer term.

Exhibit 5: Gen Z Households Transitioning Into Serious Delinquency

Source: Federal Reserve Bank of New York, as of 5/14/2024. Quarterly Report on Household Debt and Credit: Age 18 – 29 Transition Into Serious Delinquency for All Debt and for Credit Cards, Q1 2003 – Q1 2024.

So while a “maxed out” American populace and especially Gen Z grabs headlines, the fear of it cratering the economy seems off base to us. And whenever there is widespread fear of a false factor, we see it as bullish. Reality appears better than perceived, setting up positive surprise that powers stocks.