Dive Brief:

• Delinquency rates on mortgage, auto, credit card and other consumer debt rose during the second quarter as total household debt increased 0.6% to a record high of $17.8 trillion, according to the Federal Reserve Bank of New York.
• The rate of debt transitioning into “serious” delinquency — with payments late by at least 90 days — increased 0.5 percentage points to 1.59%, the highest level since Q3 2020, the New York Fed said.
• Many households, especially those with low incomes, feel a pinch from dwindling pandemic savings and unusually high inflation and interest rates, David Mericle, chief U.S. economist at Goldman Sachs Research, said in a podcast. “It’s more difficult for some people, especially those who are spending at unsustainable rates, to make those payments” to auto, credit card and other lenders, he said.

Dive Insight:

Rising household debt and delinquencies, along with an increase in unemployment to 4.3% last month from 4.1% in June, have not dampened consumer spending, which generates nearly 70% of economic growth.

“Growth of consumer spending has slowed from last year’s robust pace but remains solid,” Fed Chair Jerome Powell said on July 31 after a two-day meeting by policymakers. In turn, “economic activity has continued to expand at a solid pace,” he added.

Gross domestic product growth slowed to 2.1% during the first half of 2024 from 3.1% last year, Powell said during a press conference.

Consumer spending will probably hold steady for the remainder of this year, Mericle said.

“Strong real income gains plus a positive wealth effect gave us a robust pace of consumption growth last year and I think it will this year too — just in moderation,” Mericle said. He described as “overblown” concerns about the low household savings rate and harm to consumer spending from high inflation.

“We are seeing real income growth at a solid pace,” he said, “and we have historically strong household balance sheets, at least in aggregate.”

Mericle commented before an unexpectedly weak payrolls report Friday prompted a stock market selloff.

Payrolls expanded only 114,000 in July, below expectations and the lowest monthly increase this year. With signs of manufacturing also weakening, investors fearing a recession pulled back from risk.

The Standard & Poor’s 500 index this week has declined 2.7% as of the close of trading Wednesday.

The rise in the household debt delinquency rate in recent quarters reverses several months of falling rates during and soon after the pandemic, when lockdowns prompted consumers to forgo spending and use federal aid to pay down debt, Mericle said.

“Most of the increase that we’ve seen over the last couple of years in the delinquency rate is just normalization,” Mericle said.

Also, many consumers who paid down debt improved their credit scores, encouraging some banks to make “unwise decisions to lend to people who were riskier than they appreciated at the time,” he said. “Now those 2020, 2021 vintages of loans are defaulting at a higher pace.”

Finally, “some people probably got a little bit too accustomed to spending at a rate that would prove unsustainable once the fiscal transfers were gone,” Mericle said.