U.S. household debt rising: Moody’s

Consumer spending has been a key support to the outperforming U.S. economy, but that strength has been accompanied by a surge in debt, Moody’s Investors Service says.

Citing fourth-quarter data from the New York Federal Reserve, the rating agency said household debt rose by US$212 billion at the end of 2023 to US$17.5 trillion as consumers used credit to bolster household spending amid elevated inflation and interest rates.

The growth in debt is evident across a range of categories, Moody’s said in a report.

For instance, average credit card debt per person hit US$3,970 in the fourth quarter, Moody’s said, “a stark contrast to the reduced debt loads early in the pandemic.”

Additionally, total auto loans hit a record high of US$1.6 trillion in the fourth quarter, “reflecting steep increases in car prices and pent up demand after supply shortages in 2022,” it noted.

As debt levels rise, financial risks increase, particularly in certain parts of the population.

“The New York Fed data shows delinquency rates on credit cards and autos rising, especially for the Millennial and Gen Z generations,” it said.

Additionally, as variable-rate revolving credit is returning to pre-pandemic levels, Moody’s noted that variable interest rates on revolving credit can “induce rapid accumulation of balances in a high interest rate environment, posing repayment challenges for consumers unable to periodically clear balances, thereby increasing the risk tied to consumer credit.”

Looking ahead, some of these stresses are expected to continue growing, it suggested.

“We expect a continued increase in non-residential consumer loan delinquencies because of still-tight monetary conditions and lending standards, particularly for credit card and other consumer loans — less so for auto loans,” it said.

That said, Moody’s also noted that the recent growth in household debt is largely in line with nominal income growth, which represents “a departure from the global financial crisis era when debt growth far exceeded wage growth.”

Household debt service payments remained less than 10% of disposable income in the fourth quarter, it said, “far below the peak levels of 2007 and 2008 because 70% of household debt is in the form of mortgage debt.”

“Not only have most homeowners refinanced mortgages at low rates and long maturities, the debt is backed by housing assets whose value has considerably appreciated. Therefore, a large scale distressed mortgage event is highly unlikely,” the report said.

Still, as financial and economic stresses rise, the growth of consumer spending is expected to ease.

“With job growth slowing, pent-up demand declining, still high interest rates and the conclusion of many fiscal aid programs, we expect a corresponding slowdown in consumer spending growth this year,” the report said.

Weaker household savings rates will eventually weigh on spending, it added, as households look to rebuild their financial cushions.

The slowdown in spending is needed for the economy to enjoy a soft landing, Moody’s said.