Much of the gains in household debt since 2012 have come from student loans, auto debt and credit cards.
Much of the gains in household debt since 2012 have come from student loans, auto debt and credit cards.

America Facing $13 Trillion Consumer Debt Hangover

About 46% of Americans surveyed by the Federal Reserve could not pay a hypothetical $400 emergency expense, or would have to borrow to do so, according to a 2016 report

America Facing $13 Trillion Consumer Debt Hangover

After bingeing on credit for a half decade, US consumers may finally be feeling the hangover. Americans faced with lackluster income growth have been financing more of their spending with debt instead.
There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes. Household borrowings have surged to a record $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters. And with economic optimism having lifted borrowing rates since the election and the Federal Reserve expected to hike further, it’s getting more expensive for borrowers to refinance, Bloomberg reported.
Some companies are growing worried about their customers. Public Storage said in April that more of its self-storage customers now seem to be under stress. Credit card lenders including Synchrony Financial and Capital One Financial Corp. are setting aside more money to cover bad loans. Consumer product makers including Nestle SA posted slower sales growth last quarter, particularly in the US.
Companies may have reason to be concerned. Consumer spending notched its weakest gain in the first quarter since the end of 2009, a problem in an economy where consumers account for 70% of spending, though analysts expect the dip to be transitory. And debt delinquencies are rising even as the job market shows signs of strength.
“There are pockets of consumers that are going to be sorely tested,” said Christopher Low, chief economist at FTN Financial. “We’ve conditioned American consumers to use debt to close the gap between their wages and their spending. When the Fed hikes, riskier borrowers are going to get pinched first.”
Since the 2008 financial crisis, the Fed has kept rates low to encourage companies and consumers to borrow more and spur economic growth. Much of the gains in household debt since 2012 have come from student loans, auto debt and credit cards. Over that time, wage growth has averaged around 2.2% a year, and the pace has been slowing for much of this year.
Even if economists forecast that income growth will accelerate, those pickups have remained elusive. Donald Trump won the US presidential election in part by convincing voters that he understood their economic pain.

New Restrictions
Keeping up with household debt payments is still broadly manageable for consumers. As of the end of last year, the ratio of principal and interest payments to disposable income for Americans was just shy of 10%, less than the average going back to 1980 of 11.33%. And it’s too soon to say whether growing signs of pain among borrowers are just a return to more normal levels of delinquencies or evidence of a more serious credit downturn. Loan delinquencies are creeping higher after plunging from 2010 until the middle of 2016, but are still below historical averages.
Nevertheless, debt levels for some borrowers may be growing too high, particularly those with lower income. There are signs that lenders have started to pull back from lending to car buyers. The latest Federal Reserve survey of senior loan officers showed banks tightening standards for auto loans. Santander Consumer USA Holdings Inc., one of the nation’s biggest subprime auto lenders, said in April that it stopped allowing borrowers to make payments with credit cards.
A survey by UBS Group AG found that the pain may spread to other loan types. In the first quarter, 17% of US consumers said they were likely to default on a loan payment over the next year, up from 12% in the third quarter, before the election, wrote strategists Matthew Mish and Stephen Caprio.
The percentage of debt that’s at least 90 days delinquent rose to 3.37% in the first quarter, the second consecutive quarterly gain, according to data from the New York Fed. It’s the first time those delinquency figures have risen twice in a row since the end of 2009 and beginning of 2010. About 46% of Americans surveyed by the Federal Reserve could not pay a hypothetical $400 emergency expense, or would have to borrow to do so, according to a 2016 report.
“If the economy stumbles, the most vulnerable borrowers, the low-income, high-debt burdened, they’re going to get nailed,” said Mark Zandi, chief economist at Moody’s Analytics.

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