US Debt Composition Analysis - Recession Fears

US is the world's largest economy. Fears of economic recession loom high over the economic giant. The US might be on the brink of a loan default crisis. We are now going to analyze the debt composition of US to understand the upcoming crisis better.

Record Debt Levels

USA is sitting on a record level debt of 34 trillion dollars. This level is higher than ever before.

Now if we look at the data carefully, we would be able to notice that 10.1 trillion dollars debt has been pumped in the economy from 2020 - 2023. This is a colossal increase in debt. This also means that almost 30% of the debt in US markets has been pumped in only 3 years. Even if we say that debt levels are not a concern, such intense pumping of debt is definitely a matter of huge concern.

YOY Increase in Public Debt

Due to this, Fed rates have been increased. The interplay of Fed rates and debt levels might become troublesome for an average borrower.

Debt Composition

Domestically held public debt

Here is the debt composition of the US. 70% of the total debt consists of Mortgage loans, that is around 12.38 trillion dollars. Another area of concern is the credit card debt of US has now crossed the 1 trillion dollar mark. 

Delenquincy rate across major types of loans

Lets analyze delinquency rate across all types of loans, one by one -

Credit Cards

As we know, the borrowing rates have increased massively, EMIs of the credit card bills have become more expensive. 

The chart is clearly indicating that the credit card debt has sky rockected post the Covid-19 period. This can also be mostly because of a short lived extreme high unemployment rate as well as extreme reduction in Fed rates. At last , credit card is the easiest way to finance daily needs in absence of income.

Despite the such a massive increase in Fed rates, credit card borrowings are still sky rocketing. This nature shown by the borrowers is disasterous. This can become a good discussion for study of consumer behaviour. 

Credit card debt is getting dicey for a lot of folks. The average person is using about 23% of their credit limit, which is okay. But here's the worrisome part: 18%, a big chunk of borrowers, are maxed out, using at least 90% of their limit. And for these maxed-out folks, things are getting rough. Over the past year, a third of them have missed payments on their credit cards

We can also interpret that, utilization of credit card and delinquency rates have a high and positive co-relation. 

This is when we are seeing the reported numbers. There are many more credit card companies who are not even reporting their data saying that it would affect the credit scores of the borrowers. The truth is being hidden from you. Over and above this, the application rates for credit cards are still increasing while the rejction rates are decreasing. Credit card debt and behaviour of the borrowers show a terrible picture.

All of this clearly explains why the serious delinquency rate of credit card loans has gone up from 3.3% to 7.2%. The rate has literally more than doubled. 

Auto 

As compared to mortgage loans, auto loans have a lower lender standard. This can be because of a lot of reasons. People from all backgrounds aspire to buy a car, whereas people who are from strong financial background are the only ones who can think of getting mortgage loans.

The average auto loan rate for a new car was 9.2% in December, and 13.8% for a used car loan. This has led to the rise in the average monthly payments of Auto loans.

Auto loans have seen a decline in application rates due to an increase in borrowing rates.

Mortgage

The current delinquency rate on single family residential mortgages, booked in domestic offices,  all commercial banks is only 1.75%. However, if we look at the rate of change in delinquency YOY, the data is just about crawling up into the positive territory. History shows us that this kind of crossover can indicate recession periods. One needs to be alert to such signals.

COMMERCIAL/MULTIFAMILY MORTGAGE DELINQUENCY RATES AMONG MAJOR INVESTOR GROUPS, 2000 - PRESENT

This data also clearly mentions that the increase in delinquency rate has been a grave concern even with the major investing groups. The delinquency rate for life insurance companies has even gone above the levels of the 2008 crisis.

Currently, according stats, US is face a nation-wide housing shortage of 4-7 million houses.The prices of houses are hitting new highs very frequently. Houses are getting overpriced due to this phenomenon.

The 30 year mortgage rates have rocketed above the 2008 levels. Buying houses will become tougher and tougher for the people now. Though the Delinquency rate in mortagages is on only 1.75%, the trend is on a massive up run. Factors like 30 year mortgage rates increase will further push the delinquency up. Not only this, the rising mortagage rates have also taken a toll on the house tennants.

Housing costs are squeezing wallets: The price of a typical house has shot up way faster than most people's incomes in the last 20 years. Nationally, houses now cost about six times what the average person makes, compared to 4-5 times in the past. This is especially true in coastal areas, where some places like San Francisco are even more extreme, with housing costing over 10 times the median income.

Renting isn't much easier: Even renting an apartment has become more expensive. The portion of income needed for rent has climbed from 25% to 30% on average. This means people have less money left over for other things they need.

Millions can't afford a typical home: Nearly half (49%), or 66.6 million out of 134.9 million households in the US, cannot afford a $250,000 home according to the NAHB. US during this time is also facing a record level of unemployment.

Conclusion

As we can visually interpret whenever the YOY delinquency rate across all loans comes in positive territory, it's followed by a recession. It is not my view, this is what the data since 1990 is showing.

Intense pumping of debt at low interest rates has led to a rise in inflationary risk. This is why we are seeing record levels in increase of Federal rates. However, the borrowers are not able to withstand these rate hikes. 

The US might be in a housing bubble as per what data shows. Factors such as delinquency rate, Fed rate, unemployment rates are looking weak as of now. 

"The recession won't be over till we raise a generation that knows how to live on what they've got" 

                                                                                                                           - Unknown

Citations and references

1.	(U.S. Department of the Treasury. Fiscal Service). (N.D.). FRED. https://fred.stlouisfed.org/series/GFDEBTN
2.	(Federal funds effective rate). (N.D.). FRED. https://fred.stlouisfed.org/series/FEDFUNDS
3.	(Board of Governors of the Federal Reserve System (US)). (N.D.). FRED. https://fred.stlouisfed.org/series/DRALACBN
4.	(FEDERAL RESERVE BANK of NEW YORK).(N.D). HOUSEHOLD DEBT AND CREDIT