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  • Writer's pictureDavid Bojan

Is The US Economy Revealing Cracks Below the Surface & Should You Be Worried?

US outstanding household debts are at the highest point since the Global Financial Crisis. What does that mean for the future? Below we'll dive into why and what this means for the future. Read on.


The chart below shows the percentage of total US credit card loans outstanding for 90 days or more in arrears, otherwise known as, serious delinquency.


It highlights a rise in the total percentage of serious delinquencies from 3% in Q1 2022 to 6.9% this year, reaching 9.5% for 30-year-olds, a level not far off the Global Financial Crisis (GFC).


For 60-year-olds, the picture looks more benign, highlighting a contrasting economic environment between two consumer groups, and revealing potential cracks beneath the economy's surface.


While the younger population naturally tends to sustain a higher rate of delinquencies, for reasons such as a less stable income, and higher debt-to-asset ratios, the current spread relative to the aggregate level is at an all-time high.


US Credit Card Delinquency


US serious credit card delinquency graph
Source: Momentum Global Investment Management, Federal Reserve of New York, Q1 2024 Report on Household Debt and Credit.

What Does This Mean?


Looking at the big picture, however, the outlook appears stable. Total household debt as a percentage of GDP1 currently stands at 71%, significantly lower than the 98% level at the peak of the GFC.


Despite one of the most rapid rate hike cycles in decades and rising prices, the economy has remained remarkably resilient. Unemployment rates are at multi-decade lows, wages are strong, GDP growth has beaten all other G7 countries post-pandemic, and the stock market continues to prosper.


For these reasons, alongside pent-up pandemic savings, consumers have thus far been able to absorb the sharp rises in living costs without undue stress.


Only recently, however, are we starting to see evidence of the gains of a thriving economy not being evenly distributed. Not only are consumers on the lower end of the income spectrum showing some trouble, but small businesses have also begun scaling back hiring plans, indicating that some of the impacts of higher rates and inflation are beginning to permeate the economy.


For markets, which typically focus on the economy's broader health, this is not currently a concern and is unlikely to become one unless the headline figures related to the labour market or economic growth take a significant turn for the worse.


For voters, this does matter. Despite the headlines of a booming US economy, many are feeling the strain, which is likely to influence their perceptions of the economic success of the Biden administration.

 

Source: 1Bloomberg L.P. United States Household Debt % of GDP.


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