U.S. consumers are managing their $14 trillion debt burden—for now: Goldman Sachs

With the coronavirus pandemic continuing to ravage the U.S. economy, taking unemployment to Depression-era levels, a growing number of economists have raised concerns about the historic levels of American household debt. 

Total U.S. consumer debt hit an all-time high of $14.3 trillion in the first quarter of this year, according to the Federal Reserve Bank of New York survey, with housing debt making up the overwhelming bulk of that total. As millions of Americans file new unemployment claims every week, there are fears that many will be unable to pay their bills and meet their debt obligations—potentially triggering a spike in defaults and delinquencies that could cascade throughout the economy.

But despite worsening economic conditions, underlying data suggests that things shouldn’t get as bad as some might fear, according to Goldman Sachs economists. A research note released by the investment bank on Monday suggests that defaults and delinquencies should rise “much less than the increase in unemployment would suggest.” 

There are a few reasons for this optimism, according to Goldman economist Joseph Briggs. In addition to U.S. household debt being mostly concentrated among “higher-earning households,” debt-to-disposable-income ratios across all income levels have been “well below” their recent average—and significantly below their peak at the cusp of the 2008 global financial crisis.

As for the housing debt that accounts for the bulk of U.S. consumer debt, credit scores for new mortgages have remained elevated since the financial crisis—indicating that the current pool of outstanding mortgage debt is “safer” than that which brought the global economy to its knees in 2008, Briggs notes.

The report acknowledges that relatively healthy aggregate debt statistics could “mask underlying weakness for more vulnerable households.” Defaults and delinquencies on consumer loans typically increase in lockstep with unemployment figures, and Briggs admits that they “could rise as job losses mount.”

But he adds that delinquency rates should still be “less dramatic than their historical relationship with unemployment suggests.” That’s because expanded unemployment insurance benefits and economic stimulus payments have “more than offset income losses” among low-earning workers who have borne the brunt of job losses so far.

With House Democrats already proposing a second round of stimulus payments, that could further help Americans meet their debt obligations. Meanwhile, the CARES Act’s forbearance provisions on government-backed mortgages and federal student loans—which enable borrowers to delay payments for up to six months—have also helped alleviate the burden, according to Briggs.

There’s evidence that these policies have already helped stem the tide of defaults and delinquencies. The Goldman note reports that delinquency rates for most types of consumer loans “increased only modestly” in April; delinquencies on subprime auto loans—arguably the riskiest segment of consumer debt—climbed less than 2%, while the aggregate dollar amount of delinquent credit card loans actually declined last month. Additionally, the share of renters who paid their rent on time fell only slightly in May to 80.2%, compared with 81.7% in May 2019.

But that doesn’t mean debt-laden American consumers are out of the woods just yet. After all, current federal unemployment benefits are currently slated to expire at the end of July, and if the government fails to extend those—or replaces them with less lucrative benefits—defaults and delinquencies could well rise. 

And even if the government does extend coronavirus aid measures through the end of 2020, there could be more pain on the horizon in 2021 if the U.S. economy struggles to rebound, unemployment remains “elevated,” and more Americans find it hard to make ends meet.

In the meantime, it appears that the government’s expanded unemployment benefits, stimulus payments, and forbearance measures have helped diffuse that $14 trillion consumer debt bomb—at least for now.

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