Credit-card debt just hit a record high. Here's why it's not ringing recession alarms - yet

Provided by Dow Jones

Aug 8, 2024 12:56am

Americans haven't fallen behind on their credit-card bills at this fast a clip since 2011 - and interest-rate cuts might come 'a little too late'

Americans are falling behind on their credit-card bills at a pace not seen since the aftermath of the 2007-09 recession.

About 9.1% of credit-card balances transitioned into delinquency over the last year, according to data released Tuesday by the New York Federal Reserve Bank. The level of newly delinquent debt - which describes card balances that are 30 or more days overdue - hasn't been that high since 2011, when the U.S. was still recovering from the recession.

Americans' total credit-card debt ticked up to $1.14 trillion, a new record high, according to the New York Fed's household-debt and credit report. The data also showed that about 7.18% of credit-card balances became seriously delinquent, or more than 90 days overdue. That's also the highest in 13 years.

New York Fed researchers said that delinquency rates remain "elevated," although the pace of the increases has slowed.

The overdue bills aren't necessarily cause for panic, economists say. But the report raises another potential red flag in an economy that has flashed warning signs in recent days - from a disappointing jobs report to Monday's major stock-market selloff.

See also: 'I don't think the consumer is in trouble': Debt is going up, but that doesn't mean a recession is on the way

Driving part of the market rout was concern over the health of the U.S. economy. The unemployment rate was higher than expected in July, and corporate executives warned in recent earnings calls that American consumers appear to be cutting their spending.

"[Monday] was a kind of panic amongst markets," said Sofia Baig, an economist at data-intelligence firm Morning Consult. "But when we're pulling back and looking at consumers, this has been bubbling under the surface for a while."

The company's data shows that the postpandemic spending spree has been winding down for some time, Baig said. Last summer, consumers were happy to splurge on hotel stays, concert tickets and other discretionary purchases. This year, that spending is much more dialed back.

Though inflation is easing, higher prices on essentials like groceries have also helped fuel consumers' reliance on credit cards.

Higher interest rates, which raise borrowing costs on credit cards, car loans and other forms of credit, are also taking a toll, Baig added. In one recent Morning Consult survey, two out of three respondents said they thought interest rates in general were too high, and 75% of that group said they've cut back on nonessential spending because of higher borrowing costs.

"Consumers are tightening their belts," Baig said. "They're spending slightly less and they're reporting that higher interest rates are dampening their demand."

Consumers are cutting back

The Federal Reserve started hiking interest rates more than two years ago. Over that time, new delinquencies on credit cards and car loans have crept up from pandemic-era lows. At the same time, the personal savings rate, which measures how much cash people save, has dipped.

But rising consumer indebtedness alone isn't enough to warrant the kind of recession anxiety that spooked the markets on Monday, said Mark Vitner, a Charlotte, N.C.-based economist.

"There are a few cracks there," he said. "[But] from an overall basis, consumers look to be in pretty good shape."

Rodney Lake, a finance professor and director of the George Washington University Investment Institute, agreed that rising consumer-debt levels pose a relatively minor threat to the overall economy.

If unemployment ticks upward and more Americans lose their jobs - and their paychecks - then those credit-card and car-loan bills will become a much bigger problem, he said.

"People have levered up a little bit, especially since COVID, when they were increasing their personal balance sheets," he said. But overall, he added, "the economy is in really good territory."

Unemployment increased to a higher-than-expected 4.3% in July, according to the latest numbers from the Department of Labor. That's still a relatively low joblessness rate by historical standards.

But many investors are worried the Fed has waited too long to cut interest rates and avoid a recession. Monday's selloff stirred talk of a larger cut to rates than previously anticipated, or even an emergency meeting by the Fed. Lowering rates could kick-start a sluggish economy and give strapped consumers a little extra breathing room. The Fed's next meeting is scheduled for Sept. 17.

"Clearly the economy is slowing down more than people thought," Baig said. "Six weeks from now might be a little too late to steer the boat in the right direction."

See also: For a growing share of Americans, credit-card debt now exceeds savings. Here's how to build an emergency fund while paying off debt.

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