While the US economy is very strong, with a record low unemployment rate, increasing incomes, and more available jobs than people to work them, it is unfortunate that consumer debt is at a record high, even above the level prior to the 2008 financial crisis. It has been steadily increasing for the last several years. This debt level is one bad data point in the otherwise strong economy.
As we have reported on, when the job market and economy are at record levels of strength, as they are today, people should be paying down debt. As the economy has always been historically cyclical, with ups and downs, and while it may not always seem possible or people may not want to think about it, there is a chance that the economy will soften at some point. For example, when will the next recession occur? And if/when it does, having excessive debt can make things difficult for consumers. Or is the economy now different and recessions have been eliminated?
Types of debt outstanding in 2019
Since total consumer debt is at a record high as of March 31, 2019 (the last reported period) it makes sense that various types are at record high. Note some is considered “good” debt and some is “bad” debt. There is a big difference between the two. However of course, in a perfect world, people would have as little if any bills outstanding.
- Student loan debt is also at a record high of $1.9 trillion dollars. This equates to over $35,000 per borrower. Note this is a somewhat “good” form of debt (within reason) as it is tax deductible, is a form of investment in oneself, and other reasons. But yet even though it is good debt, that unfortunate for a student to owe as soon as they graduate.
- Auto loans are at $1.3 trillion. This is a terrible type of debt as it is borrowing money for a depreciating asset.
- Credit cards at $900 billion. Horrible form of borrowing.
- Personal loans at $300 billion. Another terrible reason to borrow money.
- Mortgages $9.52 trillion. While it can be a good reason to borrow money as it is an investment in an asset and is tax deductible, with home prices now approaching a record high (maybe a bubble is forming there?), there is risk here too.
As noted, total consumer debt outstanding is at around $14 trillion as of March 31, 2019. That is a lot of money! If/when the economic cycle ever resumes its natural up and downs (as that has been the history of the US going back hundreds of years), will there may an increasing number of bankruptcies? Consumers losing their homes again? What happens if there is another financial crisis?
Or is this a “new normal”? A “mew economy” that is managed by the federal reserve that prevents recessions from ever occurring again and they can prevent some of those historical recessions through managing interesting rates or stimulus? Who knows.
All I do know is that most experts and historians tend to say history will eventually repeat itself, which is an argument that some future recessions may occur again. And if it does, the record consumer debt levels of 2019, and the upward trend in borrowing, may come back to bite them.