Flattening A Different Curve: Record Consumer Debt

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August 19, 2020 by Mark Hammerstrom

Over the last few years, I have written a fair bit about the record increase in consumer debt in the U.S.  The numbers have been truly breathtaking and have continued to rise well above expectations. 

Writing in June of 2016, I noted that some financial gurus were then just beginning to raise alarms about the level of indebtedness.  Others were seeing positive signs that this mirrored the heating up of the economy and consumer spending and increasing debt was sustainable if economic growth continued.

The total U.S. consumer debt in June of 2016 was $12.25 trillion.  That is a significant number. At the end of the first quarter of 2020 total debt had increased to $14.3 trillion, a nearly 17% jump during those few short years. 

That was a jump just north of $2 trillion, a record 23 consecutive months of increases in household debt.

That is big.

Yet there were warning signs throughout this period that this was not sustainable.  At some point an event would occur that would tip the scale the other direction and end the trend.  As it turned out the event was the COVID-19 pandemic.

In May of 2020, the New York Fed appended an ominous note to their quarterly report reflecting economic activity in the first quarter: “The Federal Reserve Bank of New York and the Federal Reserve System are closely monitoring the economic impact of the COVID-19 pandemic, including the effects on household balance sheets.”  At that point, given the fact that the data they gathered was two months old, the true impact of COVID on the economy, jobs, personal health, had not been seen.

Move ahead to the second quarter of 2020 and the record increase in debt was, for better or worse, broken.

For the first time in six years total consumer debt dropped (by $34 billion) to $14.27 trillion. The Fed notes that the last decline was in the second quarter of 2014, and the largest decline since the second quarter of 2013 (read the Fed report here). 

Some other items of note:

  • A significant chunk of the decline ($76 billion) was related to overall consumer spending or lack of spending . 
  • Auto and student loan debt were largely flat, which is important as both had been significant factors in driving consumer debt.
  • Interestingly, mortgage debt increased by $63 billion.  This reflected continuing low interest rates in a robust housing market.
  • Of interest, too, is that mortgage originations (including refinances) reached the highest volume since 2013.
  • Those qualifying for mortgage loans also had higher credit scores, an indication that those who remained employed and had good credit records, continued to pursue their housing priorities with confidence.
  • Foreclosures also came to a halt given the moratorium on them contained in the CARES Act.
  • Remarkably, delinquency rates dropped “markedly” in the second quarter.  Good news for businesses attempting to collect debts as government stimulus payments and other support freed up cash for consumers to settle their delinquent accounts.

So what does all this mean?  That is a good question.  Only time will tell for sure.

Be rest assured, during these challenging times UCS remains open and here to serve both our clients and consumers. A trademark of UCS has always been our consultative approach when communicating with consumers.  We continue our commitment to this approach and are working with consumers to assist them in dealing with their financial situation in a compassionate, understanding manner.

 We are here as always to help.  Let us know what we can do for you today.

United Credit Service, Inc. is a full service, licensed revenue cycle management and debt collection agency that has been providing effective, customized one on one management and recovery solutions for our business partners in the Midwest since 1950. Visit our website at http://www.unitedcreditservice.com, call 877-723-2902, or check out our YouTube video.

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