Consumer spending may be up, but so is household debt, a new report from the New York Fed shows

Total U.S. household debt reached $18.39 trillion, with an "elevated" 4.4% in delinquency, according to the New York Fed. Credit card balances matched their $1.21 trillion all-time high, and while overall delinquency is mixed, student loan and mortgage delinquencies are rising. This trend, occurring amid mixed economic signals like weakening job growth, points to a "K-shaped split" in consumer financial health, with subprime borrowers increasingly struggling as their share of bank loans has surged 50.9% since May 2021.

Analysis

U.S. household financial health is showing notable signs of stress despite a strong stock market and continued consumer spending. According to the New York Fed, total household debt has risen to $18.39 trillion, with a concerning 4.4% of this debt in some stage of delinquency, a level described as 'elevated.' Credit card balances have matched their all-time high of $1.21 trillion, and while delinquencies on these and auto loans are steady, they are actively rising for student loans and mortgages. This deterioration is occurring within a mixed macroeconomic environment characterized by weakening job growth and rising inflation. Data from Equifax (EFX) further sharpens this picture, identifying a 'K-shaped split' in consumer stability. While overall delinquency rates have not yet spiked, significant strain is emerging among subprime borrowers, whose share of bank loans has surged by 50.9% since May 2021. This indicates that while higher-income consumers may be weathering conditions, a growing segment of lower-credit-score households is falling behind, posing a significant risk to consumer credit markets.

Key Decisions for Investors

• Investors should scrutinize portfolios for exposure to lenders and credit card issuers with a high concentration of subprime borrowers, as this segment is showing clear signs of financial distress.
• The identified 'K-shaped split' in consumer health suggests favoring investments in companies that cater to high-income consumers while potentially reducing exposure to consumer discretionary sectors reliant on lower-income household spending.
• Closely monitor upcoming employment and inflation data, as any further deterioration could accelerate the observed rise in delinquencies, particularly in student and mortgage debt, and negatively impact broader financial stability.
• Given the rising household debt and delinquency rates, it may be prudent to assess positions in the housing and auto sectors, where increased borrowing costs and consumer strain could dampen demand and increase credit losses.