After deleveraging in the aftermath of the last U.S. recession, Americans have once again taken on record debt loads that risk holding back the world's largest economy.
Household debt outstanding — everything from mortgages to credit cards to car loans — reached $12.7 trillion in the first quarter, surpassing the previous peak in 2008 before the effects of the housing market collapse took its toll, Federal Reserve Bank of New York data show. To put the borrowing in perspective, it's more than the size of China's economy or almost four times that of Germany's.
People are borrowing more not necessarily because they're confident about their financial prospects. They're doing it for necessities like education or transportation and, in many cases, just to get by.
On the surface, liabilities at an all-time high aren't alarming when the assets side of ledger is taken into account. Household net worth stands at a record $94.8 trillion, thanks to rebounding home values and soaring stock portfolios. But that increase has primarily benefited the nation's wealthiest, said Lance Roberts, chief investment strategist at Clarity Financial LLC in Houston and editor of the Real Investment Advice newsletter.
"When you look at net worth, it's heavily skewed by the top 10 percent," Roberts said. "The average family of four is living paycheck to paycheck."
For most Americans, whose median household income, adjusted for inflation, is lower than it was at its peak in 1999, borrowing has been the answer to maintaining their standard of living. The increase in debt helps explain why the economy's main source of fuel is providing less of boost than in the past. Personal spending growth has averaged 2.4 percent since the recession ended in 2009, less than the 3 percent of the previous expansion and 4.3 percent from 1982-90.
A look at worker pay presents a more dire backdrop for discretionary spending for those without a lot of assets. While the difference between income from wages and household debt has improved since the last recession, it's been leveling off and remains at a depressed level. The improvement also reflects less mortgage debt because of increased home foreclosures, rather than a pickup in earnings.
"This increase in leverage has sapped our ability to spend," Roberts said. "I think we're stuck."
Stocks may be at record highs but plenty of households aren't participating, according to a recent Gallup survey.
Tapping home equity via lines of credit, which provided more funds for spending in the years for the last downturn, is less of an option now as well. That's because home ownership rates are hovering close to the lowest level since the 1960s and more people rent.
Demographics are also playing a role. Millennials, those born in the early 1980s through the late 1990s, are now the biggest living generation in the U.S. They're also more likely to be saddled with student debt. The New York Fed's latest quarterly report on household borrowing and credit shows strains are developing as 11 percent of educational debt was either 90-plus days delinquent or in default in the first quarter.
Car sales, while recently showing signs of rolling over, have been an economic mainstay over the past several years. But for all those cars rolling off dealer lots, more Americans have car payments. Motor vehicle loan liabilities are at an all-time high.
Data show more car loans are delinquent. While the share of late payments remains below the 5.3 percent peak reached 1 1/2 years after the last recession, they are creeping higher. Credit-card default rates also show some very early signs of stress developing, though they too are very modest.