There was so much information given in the NY Fed’s household debt and credit report, I will add some more analysis of the report in this article. One of the most interesting findings of the report was that credit card loans which are considered seriously delinquent increased. The percentage of credit card loans considered to be seriously delinquent went up from 7.1% to 7.5% as you can see from the chart below. This corroborates with the default increase seen by Capital One. It pushed the average seriously delinquent rate of all loans up from 3.3% to 3.4%. I wouldn’t say this is a yellow flag that they economy is about to crash, but it is significant because the labor market has been strong. You would expect shrinking default rates when the labor market is strong.
An increase in the credit card default rate can either spring from job losses or the debt being too high. Anyone playing devil’s advocate, claiming that stagnant real wages are causing the increase in defaults, needs to realize that real wages fell at the beginning of the recovery and the credit card loan default rate fell. If it’s not weak wage growth or an increase in the unemployment rate that’s causing these delinquencies, it must be that the consumer is drowning in debt. This is a reasonable theory because credit card debt is excessive. The current $760 million in credit card debt isn’t at the $870 million peak, but when you consider the other debts, it’s high enough to cause trouble.
The credit cycle is important to understand when viewing these metrics because it can get confusing. When credit is expanding and lending standards are easing, it allows the economy to grow faster than the combined long run productivity and population growth rates. When the lending standards are easing and the debt is being accumulated from low amounts at a rate less than or equal to wage growth, the economy is healthy. Problems arise at the end of the cycle when standards get too low causing credit to spike. That’s what led to the subprime mortgage crisis. After being burned by defaults from risky borrowers, lenders tighten standards which makes it difficult to get a loan and halts economic growth. The lenders in the mortgage market were snake bitten from the housing collapse, so they tightened their standards.
