Is America’s $5 trillion in consumer credit ‘not good’ or ‘encouraging’? Experts are split.

United States

“Not good…. We obsess over GDP, unemployment, labor participation, etc as predictors of recession, but rising consumer debt levels have also portended economic downturns.”

— Sheila Bair, former FDIC chair, on record-high consumer credit levels

That’s former chair of the Federal Deposit Insurance Corporation Sheila Bair on the record-high consumer credit levels the Federal Reserve reported Monday.

Experts are split on whether or not U.S. consumer borrowing is a cause for concern.

Total consumer credit rose $ 23.7 billion in November, the Fed said, the biggest gain in a year. That put consumers’ total outstanding credit above $ 5 trillion for the first time, ever. 

The Fed’s data does not include mortgage loans, which is the largest category of household debt.

“Hope this is a pre-holiday blip and consumers can pay it off!” Bair wrote of the report in post on X, the platform formerly known as Twitter.

Mark Zandi, chief economist at Moody’s Analytics MCO, +0.33%, had a different take, saying that the quality of Americans’ credit has improved. 

“Household credit quality is stabilizing,” he wrote in an X post on Tuesday morning. 

He cited Equifax EFX, +0.25% data showing that household debt delinquency rates have dipped and that the growth rate of total outstanding household debt has fallen throughout 2023. 

“It’s also encouraging that the growth in household debt continues to slow across all types of loans, as tighter underwriting standards since last March’s banking crisis bite,” Zandi added in a later post. “This, along with low unemployment and Fed rate cuts, should result in lower delinquency by mid-year.”

Consumer credit has been on a downward trend in the wake of the Fed’s aggressive rate hikes and banks tightening their lending standards. But certain kinds of debt have been flashing potential warning signs: for example, the total debt Americans owe on their credit cards reached record highs in 2023. 

Others worry that extensive use of buy now, pay later services is creating a kind of “phantom debt” that isn’t documented on credit reports but still weighs on consumer’s wallets.  U.S. shoppers racked up a record-breaking $ 16.6 billion in buy-now-pay-later purchases this holiday season, up 14% from the previous year.