ByDon Schlagenhauf , Lowell R. Ricketts
In the third quarter of 2016, the upward trend in per capita consumer debt slowed in the United States and in most of the large metropolitan statistical areas (MSAs) in the Eighth Federal Reserve District.1 In fact, for the entire nation, total per capita consumer debt fell by a tenth of a percent. Mortgage, auto and credit card debt increased by less than they did in prior quarters. Serious delinquency rates largely improved, with the exception of auto debt.
The special section in this report for this quarter focuses on consumer debt trends in the smaller MSAs in the District. Included are Evansville, Ind.-Ky.; Fayetteville-Springdale-Rogers, Ark.-Mo.; Jackson, Tenn.; and Springfield, Mo.
This report uses the latest release of the Federal Reserve Bank of New York and Equifax Consumer Credit Panel with data as of the third quarter of 2016. The subset of figures in this report helps to provide a focused narrative of the latest developments in consumer debt across the District and nation. For a full set of updated figures, see the QDM appendix. 2
In prior issues of the Quarterly Debt Monitor, the general theme was growth in consumer debt across the United States and the largest District MSAs. The latest data suggest that overall growth may have stalled, despite robust student and auto loan borrowing. Figure 1 presents the percentage change in per capita total debt as well as the contribution of types of debt. Across the nation, consumer debt actually declined by a tenth of a percent. Strong growth in auto and student debt wasn’t enough to offset a considerable decline in mortgage debt.
The story in the four largest metro areas in the District is very similar to that of the nation. Per capita total debt was largely unchanged in St. Louis and Louisville. Memphis had modest growth, while Little Rock exhibited the strongest overall growth. Auto debt and student debt continue to grow, especially in Little Rock and Memphis. These two metro areas had the largest increase in auto, student and credit card debt. Unlike Little Rock, Memphis had much of that growth canceled out by the largest declines in both mortgage and HELOC debt. In contrast, Little Rock had the smallest decline in mortgage debt of the four metro areas and positive growth in HELOC debt.
The previous Quarterly Debt Monitor noted strong growth in auto and credit card debt for the nation and most of the District MSAs. Has this growth continued? Total credit card debt grew faster across all of the District MSAs and slower for the nation. Louisville swung from a 1 percent decline in the previous quarter to 0.4 percent growth. The growth rate in Memphis and Little Rock accelerated by 0.7 and 1.3 percentage points, respectively. Figure 2 breaks down the overall year-over-year growth of credit card debt into the contributions from various age groups.3 While credit card debt increased for the majority of groups, the largest increases occurred in the 31-40 and 56-65 groups. In Memphis, these two age groups accounted for a large fraction of the overall increase. The implications of the faster growth of potentially high-cost credit card borrowing may give some readers pause. However, the accelerated growth in credit card debt is not cause for alarm, given that balances and the serious delinquency rate are much lower than pre-recession levels for both the nation and the District MSAs.
Auto debt has the second-lowest average balance among debt types. Yet, auto debt has generated plenty of discussion in the media. Auto debt continued to grow at a relatively quick 6.1 percent average rate across the nation and the District MSAs. As Table 1 shows, the increase ranged from 6.9 percent in Louisville to a 5.5 percent increase in St. Louis. Figure 3 shows that much of the growth in auto debt comes from consumers in the 31-55 age range, although all groups increased their debt holdings.
Some concerns have been raised that subprime lending could be fueling much of the rapid growth seen in auto debt and that this could lead to repayment difficulties in the future. Subprime lending can be defined as lending to individuals with credit scores less than 620. Figure 4 shows that, while the share of subprime lending has increased since 2014, it is clear that this increase hasn't been drastic. However, the next section focuses on serious delinquency rates and suggests that repayment difficulties have started to materialize in the auto debt market.
The Great Recession taught us that rising rates of serious delinquency are a warning sign for a possible crisis. With the growth in consumer debt, especially auto, credit card and student debt, it is natural to wonder if delinquency rates are increasing nationally or within the District. Figure 5 clearly shows the rapid and extensive increase in serious delinquency rates for most types of debt during and immediately after the Great Recession. Serious delinquency rates steadily declined shortly after the recession concluded. Student debt was the one exception where serious delinquency rates steadily increased since 2003.
Serious delinquency rates largely fell in the third quarter of 2016, with the exception of a gradual upward taper for auto debt. Rates increased for auto debt both nationally and in the District. As can be seen in Table 1, the largest increase occurred in Little Rock, where the serious delinquency rate for auto debt increased by 0.6 percentage points to 4.2 percent. That exceeds the 3.9 percent rate peak Little Rock experienced in the fourth quarter of 2010. Serious delinquency rates continued to fall for mortgage and credit card debt for the nation and across District MSAs. In fact, serious delinquency rates for mortgage and HELOC debt are less than 2 percent. Mortgage-related debt constitutes the largest share of consumer debt, and the associated rates are on a steady downward trend. This offers reassurance that another household balance sheet crisis is not on the horizon.
The steady increase in the serious delinquency rate for student debt over this period continues to concern. The overall serious delinquency rate on this type of debt exceeds 13 percent (Figure 5). While borrowers cannot default on this debt, the high debt overhang may restrict their spending choices and delay purchases of durable goods, such as housing. While many of the serious delinquency rates have fallen to low levels, the elevated rates for auto and student debt deserve continued monitoring.
Don E. Schlagenhauf is the chief economist at the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. Lowell R. Ricketts is the senior analyst at the center.