After bingeing on credit for half a decade, U.S. consumers may finally be feeling the hangover.

Americans faced with lackluster income growth have been financing more of their spending with debt instead. There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes.

Household borrowings have surged to a record $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters. And with economic optimism having lifted borrowing rates since the election and the Federal Reserve expected to hike them further, it’s getting more expensive for borrowers to refinance.

Some companies are growing worried about their customers. Public Storage said in April that more of its self-storage customers now seem to be under stress. Credit card lenders including Synchrony Financial and Capital One Financial Corp. are setting aside more money to cover bad loans. Consumer product makers such as Nestle posted slower sales growth last quarter, particularly in the U.S.

Companies may have reason to be concerned. Consumer spending notched its weakest gain in the first quarter since the end of 2009, a problem in an economy where consumers account for 70 percent of spending, though analysts expect the dip to be transitory. And debt delinquencies are rising even as the job market shows signs of strength.

“There are pockets of consumers that are going to be sorely tested,” said Christopher Low, chief economist at FTN Financial. “We’ve conditioned American consumers to use debt to close the gap between their wages and their spending. When the Fed hikes rates, riskier borrowers are going to get pinched first.”


Since the 2008 financial crisis, the Fed has kept rates low to encourage companies and consumers to borrow more and spur economic growth. Much of the gains in household debt since 2012 have come from student loans, auto debt and credit cards. Over that time, wage growth has averaged around 2.2 percent a year, and the pace has been slowing for much of this year.

Even if economists forecast that income growth will accelerate, those pickups have remained elusive. Donald Trump won the U.S. presidential election in part by convincing voters that he understood their economic pain.

Keeping up with household debt payments is still broadly manageable for consumers. As of the end of last year, the ratio of principal and interest payments to disposable income for Americans was just shy of 10 percent, less than the average going back to 1980 of 11.33 percent. And it’s too soon to say whether growing signs of pain among borrowers are just a return to more normal levels of delinquencies or evidence of a more serious credit downturn. Loan delinquencies are creeping higher after plunging from 2010 until the middle of 2016, but are still below historical averages.

Nevertheless, debt levels for some borrowers may be growing too high, particularly those with lower income. Richard Fairbank, chief executive officer of Capital One, cautioned on a conference call in April that “increasing competitive intensity, a growing supply of credit and rising consumer indebtedness” could hurt the company’s growth rate. Ronald Havner, CEO of Public Storage, said in April that “you’re seeing a variety of things where the consumer, which is basically our customer, is stretched and or under stress.” And retailer Conn’s Inc. said on a quarterly conference call Tuesday that it sees “general consumer softness,” which weighed on its sales last quarter.

There are signs that lenders have started to pull back from lending to car buyers. The latest Federal Reserve survey of senior loan officers showed banks tightening standards for auto loans. Santander Consumer USA Holdings Inc., one of the nation’s biggest subprime auto lenders, said in April that it stopped allowing borrowers to make payments with credit cards.

A survey by UBS Group found that the pain may spread to other loan types. In the first quarter, 17 percent of U.S. consumers said they were likely to default on a loan payment over the next year, up from 12 percent in the third quarter, before the election, wrote strategists Matthew Mish and Stephen Caprio.


The percentage of debt that’s at least 90 days delinquent rose to 3.37 percent in the first quarter, the second consecutive quarterly gain, according to data from the New York Fed. It’s the first time those delinquency figures have risen twice in a row since the end of 2009 and beginning of 2010. About 46 percent of Americans surveyed by the Federal Reserve could not pay a hypothetical $400 emergency expense, or would have to borrow to do so, according to a 2016 report.

“If the economy stumbles, the most vulnerable borrowers, the low-income, high-debt burdened, they’re going to get nailed,” said Mark Zandi, chief economist at Moody’s Analytics. There could be patches of difficulty in various parts of the country, such oil-producing states, he said, adding that he isn’t forecasting a U.S. recession.

Mortgage debt has been growing slowly since 2012. The fastest-growing types of borrowings have been student loans, credit cards and auto debt. For much of this debt, there is either no collateral, like credit card loans, or collateral whose value declines over time, such as cars, said Danielle DiMartino Booth, founder of an economic consulting firm and a former adviser to then-Dallas Federal Reserve president Richard Fisher.

“This household credit cycle has been defined by the advent of all kinds of new types of unsecured lending,” Booth said. “And for a lot of those borrowers, they have nothing to show for it.”

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