After the market crash of 2008, because of banks’ unwillingness to lend, and consumers unwillingness to borrow, U.S. consumer debt declined steadily for 19 consecutive quarters, the longest period of consumer debt reduction in U.S. history. Barely four years after that, according to the New York Times, in the first quarter of 2017, U.S. consumer debt topped 2008, $12.73 trillion to $12.68 trillion.
Graph from NYT article
While proportionally mortgage debt has substantially decreased, ( 68% from 73%), auto and student loans are picking up the slack. Auto loans have increased from 6% to 9%, and student loans increased by 5% of total consumer debt, (6% to 11%, $696 billion and 1.3 trillion respectively accounting for inflation), with one in ten students falling behind in their payments. This increased burden on young adults is theorized to be playing a large part in decreasing mortgage borrowing, as increased student debt decreases their likelihood of buying a home.
Graph from NYT
This was the graph the NYT used to compare debt ratios from 2003 to 2017. As a stacked bar chart, it does make it a bit harder to realistically compare debt categories quarter to quarter, I feel it still gives a fairly accurate representation of the overall trend.
Auto loan debt, and defaulting students loans are, according to Mark Zandi from Moody’s Analytics, “a financial blemish” on otherwise financially healthy households, but “not an existential threat to households and the economy”, due to their still relatively low proportion of debt compared to mortgages.
Some consider this raise in consumer debt to be a sign of the economy recovering, as credit scores have risen enough for banks and other institutions to be willing to lend again. Others however are not so glass half full; Heather Boushey, the executive director and chief economist at the Washington Center for Equitable Growth says “In the abstract, more debt signals optimism. But in reality, families are using debt as a mechanism to pay for things their incomes don’t support.” Students are going into vast amounts of debt in order to reach higher paying occupations, but the slow rate of wage increases raises concern about the ability of students to pay off their debt used to reach those positions, causing a wave of defaults. Especially concerning is that, unlike some other types of loans, students loans carry through bankruptcy, potentially hindering their ability to buy homes or start businesses for the rest of their life.
While this new debt record has a lot of people worried, others like this Forbes article, argue that we have the lowest debt since at least 2005, after taking into account inflation, (which puts 2008’s debt at $14.46 trillion in today’s dollars), increased GDP and employment.
Overall, I felt the NYT article did a fair job at addressing the potential boons and risks of increasing consumer debt. They did use a stacked bar chart though, so they do get points off for that. As for the Forbes article, they did an excellent job at taking a closer look at the figures and claims being reported, and assessing whether they paint a complete picture of the issue, (though the tone of the article I felt was unnecessarily disparaging).