How Much of U.S. Consumer Strength is Based on Borrowing?

We often cite the U.S. consumer as the key engine driving economic growth, and for good reason—in Q1 2024, personal consumption expenditures (PCE) accounted for nearly 68% of GDP. In short, strong spending begets strong economic growth. This relationship is evident in the chart below, with PCE (red line) and GDP moving almost perfectly together.(1)

Consumer Spending is the Main Driver of GDP Growth

I’ve written many times recently that U.S. consumers are being bolstered by a strong jobs market and rising wages, which have more than offset the impact of higher prices. But recent data from the New York Fed’s Quarter Report on Household Debt and Credit shows that consumers may also be pulling strength from another, less fundamentally sound source: borrowed money.

According to the report, total household debt rose by $184 billion to reach a staggering $17.69 trillion by the end of Q1 2024. Critically, the New York Fed reported that almost 9% of credit card balances and 8% of auto loans (annualized) had transitioned into delinquency, with rising numbers across all age groups.?

Total Household Debt Has Risen Significantly Over the Past Couple of Years

Economic naysayers framed the New York Fed data as evidence that current economic strength is something of an illusion, with consumer spending numbers being propped up by households falling into financial distress.

There is some truth to this. Taken at face value, the New York Fed report shows clear signs of stress forming on some U.S. household balance sheets. Indeed, for all debt outside of student loans (which has benefited from forgiveness programs), delinquency has been steadily rising since Q4 2021 after the historic lows reached during the COVID-19 pandemic. Credit card delinquencies have risen past pre-pandemic levels.?

Before sounding alarm bells, however, some context is needed. Just because household finances in aggregate have gotten worse over the past several quarters does not mean households are in bad shape overall.

For one, delinquencies over 90 days remain at historically low levels even with the recent increase. As seen in the chart below, delinquencies are nowhere near levels experienced during the 2008 Global Financial Crisis and are lower than they were from 2014 to 2020—which are generally considered strong economic growth years.?

Taking on more debt is certainly not helping U.S. household finances, but I also don’t think it’s fair to say the situation is turning dire. The clearest evidence comes from looking at household debt service payments as a percent of disposable personal income. In other words, the question to ask is: how much is it costing Americans to service their debt?

The answer is not much, at least when comparing current levels to the past 50 years. Americans are taking on more debt, but their incomes have also been rising such that the amount of income that goes to paying off debt each month is still at historically low levels, as seen in the chart below.

Household Debt Service Payments as a % of Disposable Personal Income

Bottom Line for Investors

U.S. household debt has increased recently, but that’s also what we’d generally expect to see in an economic expansion. Wages are up, borrowing is up, and spending is up. U.S. consumers have loathed inflationary pressures, but they’re also feeling pretty empowered at the moment, in my view. The strong labor market deserves the credit.

Rising delinquencies will be important to watch going forward, however, particularly if we begin to see cracks in the jobs market. But I do not think that moment has arrived, and for now, I see U.S. households in strong shape overall.?

1 Federal Reserve Bank of New York. 2024. https://www.newyorkfed.org/microeconomics/hhdc

2 Fred Economic Data. April 25, 2024. https://fred.stlouisfed.org/series/GDP#

3 Federal Reserve Bank of New York. 2024. https://www.newyorkfed.org/microeconomics/hhdc

4 Fred Economic Data. April 2, 2024. https://fred.stlouisfed.org/series/TDSP

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