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Financial Crisis: U.S. Household Debt Passes 2008 Highs, Recession Coming Lombardi Letter 2017-05-22 08:49:15 financial crisis recession U.S. economy household debt GDP growth GDP forecast U.S. household debt is at a record high, having surpassed financial crisis levels. Consumers may not be able to keep the U.S out of a recession in 2017. News,U.S. Economy

Financial Crisis: U.S. Household Debt Passes 2008 Highs, Recession Coming

U.S. Economy - By John Whitefoot, BA |
Financial Crisis

U.S. Economy Heading Towards Recession?

There are two things the Federal Reserve’s easy money policy did. It made buying stocks a no-brainer for income-starved investors. And it made it easy to borrow, spend, and rack up debt. Nine years into the economic recession and where are we? Stock valuations are at the third-highest level ever. U.S. household debt, like the broader stock market, is now in record territory, having just surpassed 2008’s pre-recessionary financial crisis highs. Throw in weak U.S. economic indicators and gross domestic product (GDP) forecasts, and the likelihood of a U.S. recession in late 2017 or early 2018 is becoming a real possibility.

The total debt held by U.S. households reached a record high in early 2017, surpassing the eye-watering peak in the third quarter of 2008. Total debt held by U.S. households hit $12.73 trillion in the first quarter of 2017. (Source: “Household Debt Surpasses its Peak Reached During the Recession in 2008,” Federal Reserve Bank of New York, May 17, 2017.)


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The previous record high was $12.68 trillion, reached during the 2008 financial crisis and recession. This represents a solid $479.0 billion increase from a year ago and a $149.0 billion jump from the fourth quarter of 2016.

In the third quarter of 2008, $9.99 trillion was held by housing debt with $2.69 trillion in non-housing debt. Fast forward to the first quarter of 2017 and $9.08 trillion is held by housing debt and $3.64 trillion is in non-housing, high interest debt.

The greatest amount of debt in the first quarter of 2017 was held by mortgage (68% of total household debt), reaching $8.63 trillion. This was followed by student loans (11%) at $1.34 trillion, auto loans (nine percent) at $1.17 trillion, credit card debt (six percent) at $7.64 billion, and home equity lines of credit (four percent) at $456.0 billion.

Donghoon Lee, an economist at the New York Fed said, “The debt and its borrowers look quite different today. This record debt level is neither a reason to celebrate nor a cause for alarm.” (Source: Ibid.)

There is, apparently, no reason to be concerned because today’s record debt level is nothing like the debt that hammered the U.S. economy during the recession; the U.S. economy is larger, lending rules are tighter, and there is less debt in delinquency.

While the White House and Fed will tell you the U.S. economy is in the so-called Goldilocks phase, not much has changed, except for people getting more and more in debt.

On a year-over-year basis, the 90-day delinquency rate, which your bankers and lenders refer to as being seriously delinquent, got a little worse. The category that experienced the biggest increase in delinquency was everyone’s favorite: high-interest credit card debt. Meaning, things aren’t exactly heating up for U.S. consumers.

Seriously Delinquent Category Q4 2016 Q1 2017
Mortgage Debt 1.6% 1.7%
Home Equity Line of Credit 2.1% 2.1%
Student Loan Debt 11.2% 11.0%
Auto Loan Debt 3.8% 3.8%
Credit Card Debt 7.1% 7.5%

Add it up:

  • Mortgage delinquencies have worsened
  • Student loan transitions into serious delinquencies remain high
  • Auto loan balances and serious delinquencies continued their steady rise
  • Credit card delinquencies increased

This is not the kind of debt U.S. households want to deal with at a time when GDP growth is abysmal, wage growth is glacial, job security is non-existent, savings are depleted, and interest rates are rising. This is especially not the recipe for economic success in a country that gets more than 70% of its GDP growth from consumer spending. U.S. consumers cannot be expected to support the U.S economy and keep it chugging along when the infrastructure simply isn’t there to encourage growth.

U.S. GDP Forecast 2017

Despite the steady job growth since the Great Recession and rise in consumer sentiment, spending hasn’t picked up. That’s because most of the jobs created since the Great Recession have been low-paying, part-time jobs that offer little to no stability or wage growth.

This might explain why the so-called economic recovery that started under President Obama has been the slowest economic recovery since World War Two (WWII). During his eight years in office, and with plenty of help from the Federal Reserve, Obama was only able to generate, on average, annual GDP growth of just two percent. In the 10 previous expansions, GDP grew, on average 4.3%.

President Obama is the only president to never record one year of three-percent GDP growth. Under George W. Bush, average GDP growth was 2.7%. Average annual GDP growth during the economic recovery under President Clinton averaged 3.5%.

So Obama didn’t exactly hand Trump a thriving U.S. economy. In 2016, Obama’s last year in office, U.S. GDP was just 1.6%. In the first quarter of 2017, U.S. GDP was 0.7%. Trump might want his policies to help U.S. GDP reach a sustained three-percent to four-percent growth, but that is in jeopardy. The long-term projected U.S. GDP growth rate according to the Federal Reserve is just 1.8%. Most analysts expect the U.S. economy to advance just 2.2% to 2.3% through 2019. That’s only slightly better than what President Obama was able to generate.

This of course can only happen if the economic recovery continues. Should Trump’s economic policies not gain steam or if soft U.S. economic data continues to pour in, then the slow expansion could easily turn into a contraction and financial crisis.

Overvalued Stocks Supported by Big Tech Stocks and Europe

This of course would wreak havoc on the stock market. And right now, little is preventing the stock market from correcting. In fact, if it wasn’t for big tech stocks like Facebook Inc (NASDAQ:FB) and Apple Inc. (NASDAQ:AAPL), and revenue from overseas, the markets would be in free fall.

First, many S&P industries are performing poorly. The one industry that is crushing the others though is tech stocks. And the best performing tech stocks are making the entire market look better.

Alphabet Inc (NASDAQ:GOOGL), Facebook,, Inc. (NASDAQ:AMZN), and Netflix, Inc. (NASDAQ:NFLX) have been on fire; trouncing the broader markets. Since the start of 2017, the S&P 500 has advanced 6.7%. Compare this to Alphabet (20.7%), Facebook (19.2%), Amazon (23.5%), and Netflix (25.7%).

Alphabet, Facebook, and Amazon are three of the most heavily weighted stocks on the S&P 500.

Then there’s Europe. First-quarter results only look so decent because Europe is helping support U.S. revenue and earnings. The difference between first-quarter EPS growth and GDP growth is at its widest since the third quarter of 2011. When it comes to strong earnings growth, it’s better to have less exposure to the U.S. than more.

S&P 500 companies that get more than half of their revenues from overseas are reporting average first-quarter EPS growth of 20.9%. S&P 500 companies that rely on the U.S. for the majority of their revenue reported average first-quarter EPS growth of just 9.9%. (Source: “Earnings Insight,” FactSet Research Systems Inc., May 12, 2017.)

U.S. stocks might be near record levels but it isn’t because the U.S. economy is doing well. Remove the big tech stocks and overseas sales, and Wall Street is barely ticking along. Toss in record debt levels and the average American won’t be able to pick up the slack. So the idea of a U.S. recession while stocks are at record levels is not out of the question.

This doesn’t even factor in the chaos happening in Washington. Earnings and debt are one thing, but a statement in Washington or scandal could translate into increased uncertainty and be the straw that breaks the bull’s back.

If special prosecutors are hired or there is talk about obstruction of justice being an impeachable offence, investors—and the average American—can be certain that Trump’s tax plan and stimulus spending will be off the table in 2017, creating a potential financial crisis and sending the U.S. into a recession.

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