The recent months have seen a notable uptick in overall debt levels across the US, particularly in sectors like auto loans, signaling growing financial strain. Despite these challenges, the overall economic difficulties have not yet surpassed pre-Covid levels experienced in 2020.
According to the latest Quarterly Household Debt and Credit Report from the New York Federal Reserve, total household debt surged by USD212 billion in the fourth quarter of 2023, reaching USD17.5 trillion. This increase in debt was accompanied by higher delinquency rates and a rise in troubled loans. The report revealed that 3.1% of outstanding debt faced delinquency issues, marking a slight increase from the previous quarter but still 1.6 percentage points lower than the pre-pandemic levels of late 2019.
The New York Fed’s findings reflect an economy marked by robust growth, low unemployment rates, and increasing incomes. However, the economy has also faced challenges such as high inflation and aggressive interest rate hikes by the US central bank, leading to increased borrowing costs and financial complexities for borrowers.
The rise in delinquency rates was particularly evident in credit card and auto loan sectors, with 8.5% of credit card loans and 7.7% of auto loans encountering difficulties. Student loans, however, remained relatively stable due to recent forbearance measures and forgiveness programs, although some borrowers faced challenges as repayment resumed.
While delinquency rates have been climbing since late 2022, households entered the pandemic with strong financial positions, bolstered by significant government assistance. Despite the recent uptick in delinquencies, the overall credit landscape in the US remains stable, according to Gregory Daco, chief economist at EY.
Regarding specific sectors, the New York Fed highlighted a concerning trend in auto loan delinquencies, which have surpassed pre-pandemic levels, suggesting broader economic challenges. Additionally, the report noted increases in mortgage borrowing and credit card balances, with younger borrowers experiencing higher delinquency rates compared to pre-pandemic levels.
Overall, while there are signs of financial strain, particularly in certain borrowing sectors, the New York Fed emphasizes the need for continued monitoring, especially among borrowers in lower-income areas, as economic conditions evolve.