Household Debt Is Likely Not An Issue For The US Economy

Household Debt Increases $92 Billion

Q3 NY Fed household debt and credit report was released this week. It’s a great look at the health of the consumer even though it’s a bit dated. We’re trying to figure out how strong holiday spending will be and this report is from the summer. That being said, usually the most detailed reports are delayed. 

There are some nuggets of information that should help you analyze the consumer which is highly unlikely to cause the next recession because it is in good shape. A strong consumer this year has helped the economy avoid a recession.

Question is if there is a negative catalyst that hits another part of the economy, can the consumer prevent a recession? If the answer is yes, there won’t be a recession for a very long time because the consumer is in solid shape. 

As you can see from the chart below, the U.S. household debt service as a percent of disposable income is 9.69% which is the lowest rate since at least 1980. If interest rates increase, this debt service cost will increase. However, mortgage debt is 67.6% of total debt and it’s mostly locked in. Only new debt would pay the higher rates.

Let’s now look at the details of this report. The $92 billion debt increase from the prior quarter was 0.7% growth. Total debt is now $13.95 trillion. Don’t fear this number as debt should increase if the population and the economy are growing. Housing debt increased to $9.83 trillion from $9.81 trillion. But it’s still below its peak in 2008 which was $9.99 trillion. 

Debt level not surpassing that peak 11 years later shows how artificially high it was. Increases in the past 6 years have been more natural and slower. And debt bottomed in 2013 explains why this expansion has been so long. If you stated the expansion really started in Q3 2013, it would make a lot fewer people fear a recession. Expansion would be 6 years old and not the longest since the 1800s.

Non-housing debt increased from $4.06 trillion to $4.12 trillion which is a new record high. This record high is due to student loan and auto debt. It’s amazing that credit card debt is only $880 billion. It peaked at $870 billion in 2008. There has barely been any increase in credit card debt since the last cycle peak. 

Consumers have been more cautious this cycle. Student loan debt increased $20 billion to $1.5 trillion and auto debt increased $20 billion to $1.32 trillion. Student loan balances increased 3.88% yearly in Q3 which is the slowest growth rate since the data started being tabulated in 2004.

Delinquency Rate Increases Somewhat

As you can see from the chart below, the percent of all household loans that are delinquent rose to 4.78%. That’s probably not an issue, but it could become one if it increases significantly in Q4. Looking at the individual categories, the 90+ day student loan delinquency rate rose from 10.8% to 10.9%. That keeps it in the range it has been in since 2012. 

Student debt is a big problem which is why some Democratic candidates plan to wipe away some or all of this debt. Is this likely to happen? No. I don’t see most of student loan debt being forgiven. However, I wouldn’t be surprised if something gets done to help these indebted people. Keep in mind, the category with the biggest student debt issue is those who didn’t complete college.

Mortgage delinquency rate stayed low as it increased from 0.9% to 1%. Credit card rate stayed at 8.3%. Finally, the auto loan delinquency rate increased to 4.7% from 4.6%. This is the biggest issue as the delinquency rate only peaked at 5.3% last cycle. It’s amazing how little of an impact this has had on the economy. 

Declines in motor vehicle sales this year has only been modest. Retail sales growth has been mostly great this year. The consumer has helped GDP growth significantly in 2019. PCE growth was great in Q2 and Q3. We could end up seeing this rate slowly decline next year without any issues. 

On the other hand, if the labor market starts to weaken, the auto loans given to borrowers with weak credit scores will have high default rates. This delinquency rate would surpass the peak in 2010.

Another Bad Cass Freight Report

Some strong bulls don’t even see the current environment as a slowdown. Show the bulls the Cass Freight index if they don’t believe you about the slowdown. It will likely be obvious when the Q4 GDP growth reading comes out as growth is expected to be 1.5%. Friday's industrial production and retail sales reports will have major impacts on GDP estimates. They will become much more accurate.

In October, the yearly growth in the Cass Freight expenditures index was -4.1%. This weakness is partially because of tough comps as the 2 year growth stack was a solid 7.4%. Comps are quickly getting easier which means yearly growth will either go positive in the next few months or the 2 year growth stack will plummet. 2 year growth stack for shipments is already negative as it was -0.1%. 

As you can see from the chart below, the yearly growth rate fell to -5.9%. Comps will quickly get easier in the next few months for this index too. Cass Information Systems has been pessimistic for a while as it continues to see negative growth. Their best opportunity to be right will be in Q4 or if Q3 is negatively revised. Personally, I don’t see negative growth occurring if PCE growth is solid which I expect it to be.


There’s not much to worry about in the Q3 household debt and credit report. I will be concerned if the delinquency rate rises again in Q4. Cass Freight index was weak again. Cass Information Systems is probably too negative. I don’t see a recession occurring soon. This index will likely rebound without a recession. We should see a return to positive yearly shipments and expenditures growth next year. 

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