Consumer debt to GDP spikes, but why are credit card balances declining and new delinquencies declining?
By Wolf Richter for WOLFSTREET.
OK, as I mentioned on Friday, things are a little crazy in the arena of consumer debt at the moment: No payment, no problem: Bizarre new world of consumer debt. But there’s another aspect to it – that of American debt slaves themselves. And all sorts of things have happened.
Consumer debt – student loans, car loans, credit cards, other revolving debts and personal loans, but excluding mortgages and HELOCs – declined to $ 4.1 trillion (not seasonally adjusted) in the second quarter, according to Federal Reserve data. It fell off because credit card debt fell – we come to that phenomenon at that moment. But as the economy took a turn for the worse in the second quarter, with 32 million people claiming unemployment insurance, consumer debt spiked as a percentage of “nominal GDP” from the already record high of 19.2% at the end of the Good Times in Q4 2019 and Q1 2020 to 21% at the end of the second quarter:
This ratio of consumer debt to nominal GDP shows the debt burden for consumers in terms of the overall economy. Neither consumer debt nor nominal GDP are adjusted for inflation, and the impact of inflation over the years cancels out in proportion. That this spike in the ratio is another way of looking at the fate of consumers in this Pandemic economy.
The credit card phenomenon.
Revolving consumer credit consists of credit card debt and other revolving credit such as personal loans. Credit card debt by itself – a dataset the New York Fed provided in its household credit report – fell in Q2 by $ 82 billion, to $ 820 billion.
Credit card debt is generally declining first quarter, as consumers try to overcome the hangover from the holiday shop. But the only times it’s in the second quarter was during and after the Great Recession when consumers were forced to seriously retrench: 2009, 2010, and 2012, and only between 1% and 2.4%. But in Q2 2020, credit card debt dropped by 9%! A decline of this magnitude has never happened elk quarter back to 2000:
Within Q1, the steepest declines occurred in April and May and were less severe in June.
But all of them other Combined household credit categories – mortgages, HELOCs, car loans, student loans, and other loans – increased almost as much as credit card balances fell.
In addition, there is new criminal credit card balance fell – that’s the opposite of what you would expect them to do in the event of an unusual unemployment shock.
During the Great Recession, when people who lost their jobs were falling behind on their credit cards, the new criminal balance rose 14%. This was not only subprime, but all balances combined! Then, during and after the Great Recession, when lenders and consumers went through a painful cleaning process, new delinquent balance dropped and finally an early 2016 hit a two decade low. Then they re-entered the Good Times when the subprime segment got into trouble with funding these Good Times. But in Q2 came the Pandemic economy, and suddenly new misguided balance slow to 6.2%:
Why are credit card balances down and new delinquent balances down?
Almost all consumers below a certain income level received the incentive payments and most people who lost their jobs received regular unemployment benefits as the new federal benefits for unemployment, plus $ 600 per week extra. Regular unemployment benefits are scarce. But with the $ 600 per week extra, many people got more in unemployment benefits than they made in their jobs.
“Two-thirds of eligible UI workers can benefit from lost earnings and one-fifth can benefit from at least double lost income,” according to a study by the Becker Friedman Institute for Economics at the University of Chicago.
Combine this with the numerous surveys that find that about half of households do not have enough cash in their savings accounts for a relatively small need, such as $ 500.
And the picture emerges that many people operate their cash flow needs like businesses: From revolving credit lines.
For consumers who use credit cards, almost all payments, other than home payments, flow through them. And people who do not pay the balances every month end up paying interest at these rates on those outstanding balances. When these consumers receive cash, such as incentive checks or the extra $ 600 per week, they use it to pay off their credit cards, which reduces their interest costs, instead of putting it in a savings account where it earns nothing. This is a smart thing to do.
Most incentive payments arrived in April and May and contributed to the thrashing of credit card balances during those months. And later, when consumers buy something, they run out of credit cards again.
Some consumers used the incentive money in this way to take credit card payments where they had fallen behind, and other consumers did not fall behind on their credit card payments because of the incentive money, which would explain part of the decline in the statement new delinquent balances .
Another pandemic trend is that credit card issuers are offering deferral programs to credit card holders when they run into problems, under the theory of expanding and proposing. Under these issuance programs, payments are put on hold, and the credit card loan is considered “current”, although no payments are made until the end of the deferred period. This also reduces the rate of newly misused credit card balances.
And lending standards are being tightened.
Banks, fearing major turmoil in consumer credit and expecting large losses on their consumer loans, have reduced credit limits and / or closed cards from consumers who have been flagged by algos for whatever reason.
In the two months to mid-July, another 66 million people had canceled and / or reduced at least one credit card, after the 50 million people who had canceled a credit card and / or reduced their credit limit in the previous month, according to CompareCards. Most people have more than one credit card, but still, that is a substantial delay in the availability of credit.
The report points out that the actions ran across the spectrum, but that some were hit harder than others: For example, in terms of age group, millennials were most likely to report that a credit card was canceled and / or reduced as a credit limit; and in terms of income category, people with the highest income were most likely to report one or both of these actions.
The actions of closing cards and lowering credit limits do not reduce the credit card balances on the spot, but prevent these cardholders from increasing their balances on those cards.
This creates a complex picture of stimulus payments and the extra $ 600 per week flows not only into consumer spending but also into credit card balances, while banks reduce their exposure to potentially troubled credit card debt and allow already troubled cardholders to set up payments to prevent that. offenses need to be booked.
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