The Myth of the Indebted American

Household debt has risen to record levels, but income has risen even more

By Justin Lahart

A residential property offered for sale in Chicago in May. Photo: Scott Olson/Getty Images

There are reasons to worry about the strength of U.S. consumer spending. Debt isn’t one of them.

The Federal Reserve on Thursday released its detailed rundown of U.S. financial accounts. Its measure of household debt reached a record $14.6 trillion in the first quarter, about $500 billion more than in the third quarter of 2008, when the financial crisis got going, and $1.5 trillion above the postcrisis low.

It is the kind of figure that, taken out of context, could lead you to bemoan how Americans are lining up at the debt trough again. But context is important.

As a group, U.S. households made a lot more in the first quarter, and were worth a lot more, than when the crisis struck. Their after-tax income came to $14.3 trillion, at an annual rate, versus $11 trillion in the third quarter of 2008. Their net worth was $94.8 trillion in the third quarter, versus $60.4 trillion. As a result of the gains, households’ debt-to-income and debt-to-asset ratios both ticked postcrisis lows.

Mortgages are the main cause of decline. A drop in homeownership, a rise in defaults, more stringent lending terms and a weak housing market pushed mortgage debt levels sharply lower, and even now they are significantly below their 2008 peak. Some types of debt have filled the gap to an extent. Notably, separate data from the Federal Reserve Bank of New York show student loan levels are up sharply. That is a reflection not just of rising tuitions, but an increase in the number of people pursuing postsecondary and graduate educations.

On the other hand, credit-card debt remains low. The Fed reported on Wednesday that revolving credit outstanding (the bulk of which comes from credit cards) rose a scant 0.2% in April from March. That amounted to 7% of after-tax income versus 9.3% at the start of 2008 and 8.6% at the start of 2000. It counts as one of the clearest signs of how much more averse people are to taking on debt than they were in the precrisis days.

They also seem pretty averse to boosting their spending, and there are reasons for that other than debt.

It matters that a bigger share of people rent homes than before the crisis and that rising rents have been cutting into their ability to spend on other things. It matters that some things that once counted as discretionary purchases, like internet access and mobile telephone plans, are now pretty much essential to many Americans. It matters that the gains in wealth have mostly flowed to richer households, which have a lower propensity to boost spending. And it matters that despite the gains in employment, wages are going up slowly.

People are being more careful about debt, and maybe they are being more careful for a reason.

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