It feels like every year the talk grows louder about U.S. household debt being a ticking time bomb and how it’s only a matter of time before it blows up. While too much debt can have negative consequences, if used properly, it can actually be a productive use of capital. So is household debt a disaster waiting to happen? It’s crucial to look at the entire picture before forming a conclusion.
Unfortunately, the headlines don’t always paint the entire picture. It is important to understand that credit and the money supply have evolved significantly over time. What is considered “normal” today may not have been 20 years ago.
I was recently reading an article with the headline “U.S. Household Debt Climbs to $14.64 Trillion.” As if that wasn’t scary enough, I then read that household debt has increased by ~$2.5 trillion since 2013! My reaction? I cringed and said this can’t be sustainable. Then I decided to do some research to help put these numbers into context.
Source: https://www.reuters.com/article/us-usa-fed-debt-charts-graphic-idUSKBN1XN2OH.
Household Debt
While household debt has been steadily increasing since 2013, when compared with the increase in total assets and net worth, it seems insignificant.
Source: https://www.federalreserve.gov/releases/z1/dataviz/z1/balance_sheet/chart/.
What does this mean? In short, the health of the U.S. consumer is in better shape today than in years past. Net worth has increased from $75.8 trillion in 2013 to $137 trillion in 2021! This represents a ~81% increase, while liabilities have increased by only ~24%.
Some will point to seemingly endless government stimulus and zero percent interest rates as the main reason for the increase in asset prices since last April. While there is no denying the impact these factors have played, they are not responsible for the entire increase.
Median household income has taken a big leap since 2014. This is important as it indicates that the average household has more disposable income to help fuel higher economic growth and can also focus on paying down their debts and boosting their cash reserves.
Source: https://fred.stlouisfed.org/series/MEHOINUSA672N.
It should be noted that the increase is not evenly distributed across all households, and a larger share comes at the hands of the top 5%. Even so, this illustrates the improved situation of the U.S. consumer. While it’s unlikely that real estate prices and equity markets will continue to increase at the recent pace, progress has been made.
Credit Cards
Another positive trend has been the steady decline in credit card debt since the fourth quarter of 2019. American households paid off ~$82.1 billion in 2020, driving outstanding credit card debt to a near 23-year low!
The percentage of consumers who pay their credit card balances in full each month reached an all-time high of 35.1% in the fourth quarter, and the average household credit card debt balance fell to $7,519, the lowest since 1995!
These are promising and exciting trends that will hopefully continue to build momentum. We know the ripple effect that elevated credit card debt presents to the U.S. consumer and on economic growth. That said, we should expect outstanding credit card debt to rise this year as the economy reopens and consumers get back to spending.
Meanwhile, Fidelity stated that the total number of retirement millionaires has more than doubled from one year ago. They also noticed a decline on their platform in both 401(k) loans and withdrawals.
This shows that more and more U.S. households are staying invested, building their net worth, and avoiding the withdrawal of funds before retirement to pay down their credit cards. This is backed by the fact that the average bank account balance of $42,000 is ~28% higher than in 2007.
Types of Debt
While declining credit card balances are a positive, it should be noted that auto, student loan, and mortgage debt increased by ~$146 billion according to the New York Fed. This is a fairly large increase, but it is important to analyze the type of debt, not just the amount.
The reality is it is difficult to be completely debt-free. Nearly 80% of Americans have some form of consumer debt (predominantly mortgage, credit card, or auto). Having an affordable mortgage and auto loan are not necessarily a bad thing, especially with interest rates being near historic lows. Also, both are backed by a hard asset (property or car), which provides some inherent value.
While plenty of work remains to be done, there is no denying the progress that has been made the past several years. The next few quarters will provide clarity on whether this trend continues. The hope is that U.S. households continue to focus on paying down consumer debt while continuing to invest into their net worth. The question is how much of this recent progress is attributed to government stimulus and whether it can continue as the stimulus tapers off.
Stay tuned …
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