With U.S. economic growth, consumer debt remains a problem

U.S. GDP growth has improved and the national jobless rate fell to 5.5% in February, but rising consumer debt suggests that overall economic recovery is not resulting in a better financial position for many Americans.

The Federal Reserve has reported that household debt at the end of 2014 was $11.83 trillion, up $306 billion over the end of 2013. According to the Fed data, mortgage debt was up $39 billion and student loans were up $31 billion. Auto loan debt and credit card debt increased by $21 billion and $20 billion, respectively. Outstanding student loan balances now stand at $1.16 trillion.  

However, delinquency rates were unchanged at 4.3%.

“Although we’ve seen an overall improvement in delinquency rates since the Great Recession, the increasing trend in student loan balances and delinquencies is concerning,” Donghoon Lee, research officer at the Federal Reserve Bank of New York, said in the statement. “Student loan delinquencies and repayment problems appear to be reducing borrowers’ ability to form their own households.”  

CONSUMER ‘AMNESIACS’
A recent CardHub study showed a rise of $57 billion in credit card debt during 2014, up 47% over 2013, and up a 55% compared to 2012. The fourth quarter marked six consecutive quarters with year-over-year debt load increases, noted CardHub.

“While defaults are at a six-year low, the average household’s credit card balance – nearly $7,200 as of the end of 2014 – is growing dangerously close to the $8,300 tipping point previously identified by CardHub as being unsustainable,” noted the CardHub report. “Consumers have now racked up close to $180 billion in credit card debt following the nearly debt-neutral years of 2009 and 2010.”

John Taylor, with Sterne Agee in Fort Smith and a market watcher for many years, said the rise in consumer debt proves true the old saying that “the only thing we learn from history is that we don’t learn from history.” He said stagnant wage growth makes worse the rise in consumer debt.

“Consumers are amnesiacs and have forgotten the end result of being over leveraged. Another piece of data is that auto loans currently have the largest amounts financed over the longest terms in many years. With no wage growth over the last seven years how will the consumer retire all of this new credit card and auto debt?” Taylor noted.

Debt levels are not expected to improve. CardHub projects consumers will incur more than $60 billion – up 5% – in new credit card debt during 2015. Consumer debt levels during the fourth quarter of 2014 were up 6% over the same period in 2013, up 4% over the 2011 period and up 102% compared to the same quarter of 2008.

“The bad news is that while economic gains are making our spending habits sustainable for now, attitudes toward debt have not improved since the Great Recession,” noted the CardHub report.

SOME POSITIVES
Compared to pre-recession markers, household finances were improving during the first months of 2014, according to the Federal Reserve. The average inflation-adjusted wealth of U.S. households in the first quarter of 2014 was up 9.3% compared to the same quarter of 2013, with 23% of that gain the result of “rapid gains in the value of assets. The improvement also came through a 12.5% decline in average household debt.

Fortunately, mortgage delinquency rates are improving. In December, the “seriously delinquent rate – mortgages behind by 90 days or more, or in foreclosure – was 3.99%, one of the lowest rates since before the recession. The Arkansas rate in December was 4.36%.

While housing related debt is the majority of debt carried by the average consumer, a report from the U.S. Federal Reserve branch in St. Louis shows that homeownership is declining. The homeownership rate for families with a head of household between 40 and 61 years old fell from 76.9% in 2005 to 72.1% in 2013. Ownership among families with a head of household younger than 40 fell during the same period from 50.1% to 42.2%.

Home ownership among families with a head of household older than 61 grew by 1% during the same period.