Record household debt levels and rising delinquencies are exposing fresh cracks in the US economy following months of persistent consumer demand, a historically strong labor market and relatively stable buyer confidence.

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American households held an all-time high of $17 trillion in debt at the end of March, a 19% increase over a year earlier. Credit card debt, which tumbled during the pandemic, has risen to heights well above pre-pandemic levels. Delinquency rates for credit cards, auto loans and mortgages have all begun to inch up. And, as the Fed has boosted its benchmark interest rate above 5% for the first time since 2007, the cost of servicing debt has soared, pinching household budgets and eating into wage growth.

Rising debt and soaring interest rates are colliding as banks are tightening lending standards. The combined forces threaten to curb consumer spending and lead the US into a recession that economists have been anticipating for months.

"Household debt dynamics are moving in the wrong direction," said Shannon Seery, an economist with Wells Fargo.

'Increasingly vulnerable'

Debt levels are not yet in a "worrying state," Seery said, as wealth and net worth measures remain elevated in all income groups and excess savings, built up by the government's push to stimulate the domestic economy with trillions of dollars during the pandemic, remain.

While the US personal savings rate fell from a record high of 33.8% in April 2020 to 2.7% in June 2022, consumers still had $1.1 trillion in excess savings as of January 2023 after running down those savings since September 2021, according to an analysis by John O'Trakoun, a senior policy economist with the Federal Reserve Bank of Richmond.

Excess savings, credit and real income growth, which rose about 1% from April 2022 to April 2023, have propped up household consumption, Seery with Wells Fargo said. Savings and credit, however, will likely be either depleted or seriously strained later this year, leaving consumer strength almost entirely dependent on continued high demand for labor and, in turn, higher wages.

"In short," Seery said, "households are still in relatively decent shape currently, but if they continue to spend at elevated rates even once excess liquidity has been depleted … it doesn't necessarily have to come with recession this year, but it will leave households increasingly vulnerable in the event of another shock."

Resilient consumer

Household spending has remained at fairly robust levels in spite of the Fed's aggressive push to fight inflation with rate hikes, turmoil in the banking sector, and uncertainty over the debt ceiling, all of which have tightened credit standards.

"Throughout all that, spending has remained surprisingly robust," said Michael Zdinak, an economist who leads the US consumer markets service at S&P Global Market Intelligence. "There's a lot of resiliency."

Strong consumer spending and a historically low unemployment rate have likely prevented an imminent recession, said Gabriel Mathy, an economics professor at American University.

"The Fed rate hikes don't seem to have slowed the economy down enough to tip the US into recession," Mathy said.

Still, credit, wealth and savings levels have all shown signs of wobbling, and consumer spending is poised for a significant slowdown, said Greg Daco, chief economist at EY-Parthenon.

"I think we're starting to see some areas of softness," Daco said. "There are some indications that the state of household finances is not as robust as it was just a few months ago."

Rising delinquencies

Delinquencies throughout the economy have begun to increase, according to the most recent data from the Federal Reserve Bank of New York.

The number of auto loans at least 30 days delinquent increased to nearly 6.9% in the first three months of this year, the highest rate since the first quarter of 2020, the data shows. The percentage of similarly delinquent credit card loans rose above 6.5% in the first quarter of this year, up from a low of 4.1% in the fourth quarter of 2021 and the highest percentage since the first quarter of 2020.

Delinquent mortgages hit their highest level since the third quarter of 2020.

"In an environment where income growth is slowing, the job market is cooling, where some of the previous protections on consumers are likely to expire over the course of the summer, that will have an effect on people's ability to spend," Daco said.

Household debt plunged during the pandemic when spending plummeted and stimulus checks arrived. But roughly three years later, credit card debt jumped above pre-pandemic levels. As of mid-May credit card loans were up about 14% from where they were a year ago, and total credit card debt is soon expected to exceed $1 trillion for the first time ever.

Faced with higher costs on everything from eggs to used cars, Americans are likely using their credit cards again as a "patch" for their monthly bills, said Sean Snaith, director of the University of Central Florida's Institute for Economic Forecasting.

Americans who significantly paid down their debt during the pandemic are now likely using those credit cards to cover shortfalls in their household budgets as stubbornly high inflation continues to outpace wage gains.

Mike Mekus, a 26-year-old executive assistant who has lived in Manhattan for the past three years, has roughly $9,000 in credit card debt. Mekus hopes to have this debt mostly paid down by early next year, but previous efforts to pay down this debt have been complicated by job uncertainty, medical bills and a high cost of city living, accelerated by the largest spike in inflation since the early 1980s.

"It's honestly not so bad, but it just hangs over you forever until the end of time," Mekus said. "Really attacking the debt and paying it off would make it so much more freeing and easier to save and have less concerns financially."