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U.S. Economic Uncertainty: Soaring Household Debt and Surging Delinquencies Are Raising Concerns

Isaac Nuriani    |
Mar 1, 2024
  • Household debt in America now stands at a record $17.5 million.
  • Economist says rising debt delinquencies could turn mild downturn into a major recession.
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When you hear the term “economic uncertainty,” what comes to mind? 

If you’re like many people, you probably think of things such as increased risk to the stability of the global banking system; a soaring national debt; or even military conflict between significant players on the geopolitical stage. 

You’d be right, of course – each of those is a “textbook” example of events and conditions that give rise to uncertainty. But it might be worth noting that economic uncertainty also can be the function of factors that don’t seem, at first glance, to be nearly as dramatic…and, therefore, easier to miss. 

We’re going to talk about one of those possible factors this week. 

A piece of recent news that hasn’t captured headlines the way, for example, domestic political discord or geopolitical tension have…nevertheless carries with it potentially outsized implications for the economy in its own way. 

At the beginning of February, the New York Fed released its Quarterly Report on Household Debt and Credit for the fourth quarter of 2023, which revealed that Americans are continuing to rack up debt at a phenomenal pace. 

Household debt is now, in fact, at record levels. And so far, there’s no real sign it’s slowing down.  

That’s concerning enough. But the Fed’s report noted something else, something that suggests household debt levels can’t keep rising without eventually producing significant consequences: 

Delinquencies are starting to surge. 

This week, we’re going to discuss the enormous levels of debt carried by American households that have the potential – according to at least one respected economist – to create challenges for not only the consumers most directly affected, but for the economy, as a whole. 

The topic of soaring household debt in America is presented as a point of discussion in its own right. But it’s also presented in the context of economic uncertainty, more generally. That is, as a reminder that potentially significant implications for stability can arise as much from seemingly less dramatic conditions as from the most sudden and provocative crises. 

With that, let’s take a closer look at the current – and concerning – state of debt and delinquency in American households. 

American Households Now Carrying a Record-High $17.5 Trillion in Total Household Debt 

According to the New York Fed’s latest Quarterly Report on Household Debt and Credit, total household debt rose by another $212 billion last quarter to reach a new all-time record $17.5 trillion.[1] 

Debt balances rose across every major category of debt last quarter, save for student loans. Mortgage balances increased $112 billion, or nearly 1%, to land at a total of $12.25 trillion for the quarter. Auto loans, which have been rising steadily since 2011, increased by another $12 billion, ending the quarter at $1.61 trillion.[2] 

Once again, however, the biggest story in terms of debt-balance growth was probably that of credit cards. Credit card balances climbed $50 billion in Q4, to a total of $1.13 trillion, which translates to an eye-popping quarter-over-quarter jump of nearly 5%.[3] 

The persistent increase in household debt, both overall as well as across basically every sub-category of debt out there, has been an ongoing narrative since the middle of 2013.[4] Even as balances have been on the rise, however, analysts have largely dismissed the significance of the increases based on a related metric: delinquency rate. 

“Despite the many headwinds American consumers have faced over the last year—higher interest rates, post-pandemic inflationary pressures, and the recent banking failures—there is little evidence of widespread financial distress for consumers,” Fed researchers wrote last August. “American consumers have so far withstood the economic difficulties of the pandemic and post-pandemic periods with resilience.”[5]  

The evidence certainly bears that out. From January 2021 through June 2022 – a period characterized by the wide variety of pandemic-cued financial considerations granted to Americans – the credit card delinquency rate, for example, remained below 2%.[6]  

Even at the time of the Fed’s statement, as excess savings was dwindling and pandemic relief programs (both governmental and private) were winding down, the delinquency rate on credit cards was about 2.5% and the charge-off rate – the rate at which lenders write off accounts as losses – was roughly 3.3%.[7] 

As Fed researchers noted more recently, however: 

“As forbearances ended and the savings from stimulus payments were exhausted for many households, delinquency rates have been rising again, for all types of debt.”[8] 

Indeed, they are. And as of the New York Fed’s fourth-quarter report, the two debt categories now characterized by delinquency rates above pre-pandemic levels are auto loans and credit cards. And some analysts are getting concerned. 

Economist: Rising Delinquencies Could Help Trigger a “Deep Downturn” 

In fact, auto loan balances and credit card balances transitioned into delinquency last quarter at rather substantial annualized rates of 7.7% and 8.5%, annualized, according to the New York Fed.[9]  

“Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels,” Wilbert van der Klaauw, economic research advisor at the New York Fed said. “This signals increased financial stress.”[10] 

The rate at which debt has moved into “serious delinquency,” which is 90 days or more past due, is significant, as well.  

The rate was more modest among auto loans – 2.66% of those transitioned into serious delinquency last quarter compared to 2.22% the year prior. However, 6.4% of credit card debt was seriously delinquent in Q4. That’s a year-over-year increase of 59% from the 4% rate realized at the end of 2022.[11] 

In addition to taking on more debt, consumers now are paying a lot more for the “privilege,” and that’s presumably only adding to borrowers’ stresses. From the time the Federal Reserve kicked off its latest rate-tightening cycle in the spring of 2022, the average rate on credit cards has soared from 14.5% to 21.5%.[12] 

On a related note, the number of Americans carrying balances from month to month has gone up significantly over the last couple of years. A recent Bankrate survey found that 49% of cardholders now are carrying balances from one month to the next, a marked increase from the 39% doing so in 2021.[13]  

In a recent analyst note written following the publication of the New York Fed’s report, Joseph LaVorgna, chief economist at Nikko Securities, underscored the inherent economic uncertainty implied by not just the rising record debt balances across the board, but the delinquency surge now evident in key categories of debt. 

Suggesting the trend of rising delinquencies is particularly concerning “because it is happening while the economy is still growing,” LaVorgna pondered: 

“What happens if the economy slows and unemployment quickly rises? Delinquencies could surge, in turn leading to a self-reinforcing credit crunch. In other words, a mild downturn could turn into a deep one.”[14] 

LaVorgna’s speculation, seemingly reasoned and cogent, succinctly connects the dots from surging household debt and delinquencies to potential national recession. In the process, it also illustrates the scope of the uncertainty that investors must manage. 

As for how they might manage it, we’ll discuss one option next…one that’s proving popular with institutional asset managers and even central banks. 

Institutional Investors and Central Banks Turning to Gold to Help Manage Uncertainty 

Uncertainty can be an especially formidable challenge for investors, largely because the assets to which those investors typically turn to meet their long-term goals have a tendency to react badly to it. By definition, uncertainty suggests the possibility of eventual outcomes that range from order and functionality to disorder, instability and even chaos.  

Select alternative assets, however, have the potential to remain resilient – or even thrive – against a backdrop of uncertainty, even when that uncertainty has the potential to generate genuine economic distress. Precious metals are examples of such assets. 

One of the more compelling pieces of research in support of this idea was generated recently by analysts at Sprott Wealth Management, a global asset management firm. The firm looked at the performance of gold and other popular assets throughout seven different periods of crises over the previous decade and a half ranging in duration from a handful months to multiple years.  

The crises included the global financial crisis, the 2010 European debt crisis, the global health crisis and even the Russia-Ukraine war – about as diverse a collection of distresses and sources of global economic uncertainty as you’re going to find in such a relatively brief sample period. 

Sprott found that – to a notably significant degree – gold proved, on average, to be the most resilient asset during these periods, overall.[15]  

The perceived value of gold as an asset that can help to diminish the impact of uncertainty and its consequential outcomes is widely held among such investors as professional money managers and even central bankers. 

In a report published last year, the financial journal Investment News detailed the results of a survey that found professional investors – from sovereign wealth managers to hedge funds – expect to either maintain or increase their gold exposure throughout 2024 without regard to short-term price fluctuations.[16] 

“Gold continues to shine as a hedge against uncertainty,” Investment News declared.[17] 

Jaspar Crawley, head of institutional investor relationships at the World Gold Council, told Investment News, “People are looking for things that really do move differently and gold does that.”[18] 

Central banks are turning to gold, as well, as a way to help lower the potential impact of uncertainty on their reserves. By an overwhelming margin, central bankers surveyed by the World Gold Council cited such considerations as “performance during times of crisis,” “long-term store of value,” and “effective portfolio diversifier” as reasons they’ve been accumulating gold at or near record pace over the last two years.[19]  

Individual investors tend not to have quite the same concerns when it comes to financial stewardship as do billion- and trillion-dollar asset managers or central banks. But the concerns they do have may be every bit as important and even more personal to them 

Which perhaps means two things: First, individuals may want to ensure they recognize and appreciate the full range of concerns that can generate uncertainty…and that uncertainty itself can generate. These could potentially include sudden, large-scale events with the potential to exert a direct impact on the global economy, but they also can include less dramatic but still powerful influences such as rising debt and delinquencies among American households.   

Second, some people may wish to give the same serious thought to uncertainty mitigation that asset managers and central banks do. Physical gold is available to them, as well, and can even be accessed through a gold IRA. Whether owning gold is, in fact, an appropriate option for any given individual is a decision they will have to make for themselves. But given the size and scope of uncertainty risks swirling above the heads of all investors these days, many may conclude that it might be prudent to at least consider the idea of doing something to lessen the potential harm. 

 

 

 

[1] Federal Reserve Bank of New York, “Household Debt and Credit Report – Q4 2023” (February 6, 2024, accessed 2/29/24). 
[2] Ibid. 
[3] Ibid. 
[4] Federal Reserve Bank of New York, “Quarterly Report on Household Debt and Credit – Q4 2023” (February 6, 2024, accessed 2/29/24). 
[5] Andrew Haughwout et al., Federal Reserve Bank of New York, “Credit Card Markets Head Back to Normal after Pandemic Pause” (August 8, 2023, accessed 2/29/24). 
[6] Adam McCann, WalletHub, “Credit Card Delinquency Rates and Charge-Offs (2024)” (February 26, 2024, accessed 2/29/24). 
[7] Ibid. 
[8] Andrew Haughwout et al., Federal Reserve Bank of New York, “Auto Loan Delinquency Revs Up as Car Prices Stress Budgets” (February 6, 2024, accessed 2/29/24). 
[9] Federal Reserve Bank of New York, “Quarterly Report on Household Debt and Credit.” 
[10] Federal Reserve Bank of New York, “Credit Card and Auto Loan Delinquencies Continue Rising; Notably Among Younger Borrowers” (February 6, 2024, accessed 2/29/24). 
[11] Ibid. 
[12] Federal Reserve Bank of St. Louis, “Commercial Bank Interest Rate on Credit Card Plans, All Accounts” (accessed 2/29/24). 
[13] Constance Summer and Poonkulali Thangavelu, Bankrate, “Average credit card debt in the U.S.” (February 14, 2024, accessed 2/29/24). 
[14] Jeff Cox, CNBC.com, “Credit card delinquencies surged in 2023, indicating ‘financial stress,’ New York Fed says” (February 6, 2024, accessed 2/29/24). 
[15] Sprott.com, The Case for Gold in Crises” (accessed 2/29/24). 
[16] Investment News, “Gold continues to shine as a hedge against uncertainty” (August 23, 2023, accessed 2/29/24). 
[17] Ibid. 
[18] Ibid. 
[19] World Gold Council, “2023 Central Bank Gold Reserves Survey” (May 30, 2023, accessed 2/29/24); World Gold Council, “Gold Demand Trends Full Year 2023” (January 31, 2024, accessed 2/29/24). 
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