25-03-2025
Debt stress signals growing cracks in household finances
In the aggregate, American households' finances are looking just fine. But nobody lives in the aggregate, and there is evidence of rising financial strain for a meaningful slice of the population.
The big picture: Cracks have appeared in many household balance sheets over the last year and widened further in the final months of 2024, leaving some Americans more vulnerable to any disruptions that are to come.
But it has not been obvious from top-line numbers, as disproportionately affluent families have benefited from a surging stock market, rising home prices, and fixed-rate mortgage debt held over from the low-interest environment of three years ago.
What they're saying: "The number of people falling behind on debt payments has risen sharply, even though households collectively built up their holdings of liquid assets" at the end of last year, wrote Samuel Tombs, chief U.S. economist at Pantheon Macro, in a new note.
By the numbers: The net worth of American households — the cumulative value of their assets minus debts — edged up to $160.3 trillion in the fourth quarter, up 9.3% from a year earlier.
Household debt service as a share of disposable personal income was at 11.3% in Q4, below its pre-pandemic levels, per Federal Reserve data.
Yes, but: The share of outstanding credit card debt that is more than 90 days delinquent rose to 11.4% in the fourth quarter, per New York Fed data, the highest in 13 years (it hovered around 8% in the years before the pandemic).
Indeed, in the last two decades, it has only been higher during and immediately following the 2008 Great Recession.
Looking forward, consumers anticipate further difficulty handling their debts. The average odds people placed that they won't be able to make a minimum debt payment in the next three months rose to 14.6%, the highest since early in the pandemic and well above 2019 levels.
Between the lines: Those stresses for borrowers have occurred against a backdrop of rising asset prices and a strong job market. The numbers could shoot higher if federal cutbacks and trade wars generate higher unemployment or further wobbles in financial markets.
The end of Biden-era student loan relief efforts could further stress some borrowers, Tombs argued.
Further Fed interest rate cuts could ease some financial pressure on households straining under debts, but still-elevated inflation may constrain the central bank's room to maneuver.
