Rising Tide of Consumer Credit: Navigating the Uncharted Waters of $5 Trillion Debt and Escalating Delinquencies
Wells Fargo published an important article on the rise of consumer credit in the US on January 10th, 2024.
The article delves into the growing trend of consumer credit usage in the United States, emphasizing a significant milestone where outstanding consumer credit exceeded $5 trillion in November. This increase is largely attributed to consumers frequently using credit cards, a trend that continued for the third consecutive month. The total consumer credit saw a rise of $23.8 billion, with revolving consumer credit, predominantly comprising credit card debts, contributing a major portion ($19.1 billion) of this increase. This category, often utilized for a range of expenses from basic necessities to holiday shopping, saw the largest dollar increase since March 2022 and the third largest in history. The month-over-month increase was 1.5%, a significant jump compared to the slower growth rate of 0.7% observed in the first nine months of 2023.
The article highlights the striking nature of this increase in consumer credit usage, especially considering the backdrop of the highest credit card interest rates seen in over three decades. Interest rates on credit cards soared above 21% in the fourth quarter of 2023, yet this did not deter consumer spending. Rates for other significant expenses, like auto purchases, also escalated, adding to the financial burden on consumers. The article points out the growing concern as non-mortgage interest expenses, a part of disposable personal income, have been increasing rapidly, indicating rising costs for consumers who carry a balance month-to-month.
Data from the U.S. Department of Commerce shows a concerning trend where personal interest expenses as a share of income could soon approach 3%, a level last seen before the 2001 and 2008 recessions. The article suggests that continued reliance on credit might extend economic expansion, but it also increases vulnerabilities in the household sector.
The issue of rising delinquencies is also addressed. Data from the New York Fed indicates that delinquencies, particularly in credit cards and auto loans, have been on an upward trend for the past two years. This trend likely worsened in the fourth quarter of 2023 due to even higher interest rates. The article also brings attention to the less visible but expanding category of “buy now, pay later” debt, referred to as ‘phantom debt’ due to the lack of comprehensive public data.
Despite these concerning trends, the article notes that household finances are not in a state of collapse. The overall ratio of household debt to disposable income remains historically low, primarily due to large amounts of mortgage debt locked in at low rates. However, the growing reliance on consumer credit does pose risks, potentially leading to a slowdown in discretionary spending. The article concludes that while increased credit usage can temporarily support the economy by maintaining consumer spending, especially when other sectors are struggling, a robust labour market is a more sustainable and healthier driver of consumer spending in the long run.