The shock surge in US car-loan delinquencies gives a clue why the Fed is treading carefully even in a booming economy

The shock surge in US car-loan delinquencies gives a clue why the Fed is treading carefully even in a booming economy

In his State of the Union speech this month, US President Donald Trump cited low unemployment and positive growth in manufacturing jobs as evidence of an “economic miracle” underway in America.

But the Federal Reserve, which is pausing its plan to raise interest rates for now, is most likely using other yardsticks to gauge US economic health.

For one, America is piling on debt.

Aggregate borrowing to cover mortgages, credit cards, student loans, and car loans rose for the 18th straight quarter in the final three months of 2018, reaching a record high of $13.5 trillion. Especially worrying: A new Federal Reserve Bank of New York report on Tuesday said more than seven million Americans had reached serious delinquency status on their auto loans.

Fed economists said the surge in delinquent borrowers, defined as being at least 90 days behind on payments, was “surprising” considering the strong labor market and economy.

The chart below shows just how big the American debt burden is.

AJ Bell

American consumers are “exposed to any unexpected loss of their job or increase in interest rates,” says Russ Mould, an investment director at the UK investment platform AJ Bell.

“This leaves the Fed with every reason to tread carefully when it comes to increasing headline interest rates, since the higher debt pile leaves the US much more sensitive to even minor changes in borrowing costs.”

America has never been more indebted: On a government level, the national debt load surpassed $22 trillion on Monday, February 11, the first time that the total outstanding public debt had topped that threshold. As a percentage of gross domestic product, US debt is now about 215%, which could be a sign the Fed is headed into what Mould calls a “Japanese-style debt trap.”

Japan’s government debt also stands at about 200% of GDP.

Read more: The US budget deficit ballooned to $779 billion this year, its highest since 2012, driven by Trump’s tax law and the massive budget deal

Mould outlines the pickle in which the Fed’s chairman, Jerome Powell, could find himself:

“Powell’s interest rate pause could be an early symptom of this dilemma, one which has already become evident over the past three decades in Japan, and more recently in nations which tried to raise interest rates but quickly backtracked, as economic growth began to slow, weighed down by an unwelcome appreciation in the local currency, higher interest payments or both.”

Then there’s the unemployment rate — hovering near lows not seen since the ’70s — that is likely to start rising, which Mould says may mean “many Americans may be poorly prepared for any ill-wind that does blow.”

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