Outstanding new U.S. household debt grew to $16.9 trillion in Q4 2022, and total new household debt delinquencies registered double-digit increases by quarterly and annual measures, an early indication of the fallout of an expected recession, industry analysts said.
In Q4 2022, delinquencies were up 17 basis points over Q3, and they were up 79 bps compared with Q4 2022, according to analysts at Moody's Investors Service, citing the Federal Reserve Bank of New York's latest Household Debt and Credit Report. Analysts, led by Moody's senior vice president of its financial institutions group Warren Kornfeld, interpreted its findings in its most recent consumer sector comment, out earlier this week.
Broken down by sector, new auto loan delinquencies were 6.64% in the Q4 2022, up 43 bps from the previous quarter, and are 27 bps shy of there they were in 2019, according to the Moody's research. New credit card delinquencies were 5.87% in Q4, up 63 bps from Q3 2022.
"People are leveraging up and with inflation weighing in a decent number of households' balance sheets," Kornfeld told Asset Securitization Report. The inflationary pressures are especially intense on lower income households that had depleted their COVID-stimulus savings. "On the performance front in general, performance is going to be mostly proportional to the change in unemployment."
Korn noted that Moody's expects a mild recession, with unemployment peaking at about 5% in 2024.
Early signs of a pullback?
Also, new issuance is already noticeably down across most of the major asset classes on a year-to-date basis, as expected. New credit card ABS was $478 million by Feb. 16, 2023, eclipsed by the $4.0 trillion in issuance by Feb. 17, 2022, according to the Asset Securitization Report's database. Residential mortgage-backed securities issuance was $10.6 billion on the same date in 2023, down from $36.0 billion in 2022.
Only auto ABS made gains by mid-February compared with a year earlier, the ASR database shows. New issuance was $23.8 billion by Feb. 16, 2023, a 25.3% increase over $18.9 billion issued around the same date in 2022.
Improvement in spreads has largely driven such strong auto ABS issuance performance, Deepika Kothari, a senior vice president at Moody's and head of its consumer ABS surveillance for the U.S. and Canada told Asset Securitization Report.
"Issuance this year is largely a yield story, more so than a demand story," Kothari said. Another potential influence on auto ABS issuance is the relative dearth of supply of other asset securitizations, allowing issuers in the auto sector to benefit from investor demand for yields.
Consider the source of the ABS issuance, Kornfeld said, and whether car manufacturers' captive financing entities were simply becoming more active after slowing down in 2021. The same could be said for bank credit cards, which have been surprisingly quiet, and because the dynamic is so similar to that of captive auto finance companies.
"I am surprised that we are not seeing a pickup in credit card securitizations," Kornfeld said. "Banks were flush with liquidity in the last few years."
The impact of inflation
At the bank level, credit card debt made strong gains, as balances rose 15.2% in Q4 2022 over the year, Moody's said. Analysts said they expect consumer demand for the revolving debt to remain high as inflation continues to drive up nominal spending, chipping away at disposable income and as excess savings declines.
The inflation dynamics will restrain growth in at least two areas of consumer debt, however: mortgages and auto loans. Make no mistake about auto loan originations: they are increasing. That debt rose 3.1% or $186.2 billion in Q4 compared with a year before. Mortgage originations were down substantially, and balances reflected that. Balances saw a large 9.1% year-over-year increase in Q4 2022, but fell short of the year-over-year balance increase in Q3 2022, which was 9.3%.
The upper-income level of American households might be driving strong retail spending, and lower-income Americans are feeling financial stresses, but overall, the average middle income American consumer is back to a 2019 level of financial health and profile, Kornfeld said.
