America is showing early signs of growing burden of loans for borrowers with lower incomes. Household borrowings have surged to a record of $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters. With the Federal Reserve to hike the rates further, it will get more expensive for borrowers to refinance.
Companies are worried about increasing stress amongst the consumers. Credit card lenders including Synchrony Financial and Capital One Financial Corp. are setting aside more money to cover bad loans. Consumer product makers including Nestle SA posted slower sales growth last quarter, particularly in the U.S, says Financial Express.
The debt delinquencies are rising even as the job market shows signs of strength. “There are pockets of consumers that are going to be sorely tested,” said Christopher Low, chief economist at FTN Financial.
“We’ve conditioned American consumers to use debt to close the gap between their wages and their spending. When the Fed hikes, riskier borrowers are going to get pinched first,” he says.
Much of the gains in household borrowings since 2012 have come from student loans, auto debit, and credit cards. Wage growth has averaged around 2.2 percent a year over that time, and the pace has been slowing for much of the year. Even if economists forecast that growth will accelerate this year, those pickups have remained elusive.
Richard Fairbank, chief executive officer of Capital One, cautioned on a conference call in April that “increasing competitive intensity, a growing supply of credit and rising consumer indebtedness,” which could hurt the company’s growth rate.
While, Ronald Havner, CEO of Public Storage, said in April that “you’re seeing a variety of things where the consumer, which is basically our customer, is stretched or under stress.”
Mortgage debt has been growing slowly since 2012. The fastest-growing types of borrowings have been student loans, credit cards and auto debt. For much of this debt, there is either no collateral, like credit card loans or collateral whose value declines over time, such as cars, said Danielle DiMartino Booth, founder of an economic consulting firm and a former adviser to then-Dallas Federal Reserve President Richard Fisher.
“This household credit cycle has been defined by the advent of all kinds of new types of unsecured lending,” Booth said. “And for a lot of those borrowers, they have nothing to show for it.”