September 13, 2019 / 9:27 AM / 3 days ago

Column: U.S. consumers show growing signs of debt distress

LONDON (Reuters) - Most U.S. borrowers remain in good shape but pockets of distress are emerging, especially in the farm sector as a result of tariffs, and among a minority of consumers struggling despite healthy employment and wage growth.

Corn is loaded into a truck at a farm in Tiskilwa, Illinois, U.S., July 6, 2018. REUTERS/Daniel Acker/File Photo

The proportion of commercial bank loans and leases 30 days or more past-due at the end of the second quarter dropped to its lowest since at least 1985, when current records began, according to data from the Federal Reserve.

The percentage of all bank loans and leases in arrears was just 1.50% at the end of June, down from 1.64% at the same point in 2018 and a record high of 7.40% in March 2010 in the aftermath of the last recession.

Residential real estate loans in arrears fell to 2.59%, from 3.22% a year earlier, and the lowest since the second quarter of 2007, before the eruption of the subprime mortgage crisis.

Commercial real estate loans and commercial and industrial (C&I) lending also show delinquency rates at or close to multi-decade lows in a sign of corporate health.

(Chartbook: tmsnrt.rs/2AohtuR)

But in other areas there were signs of problems emerging that should concern lenders and policymakers, underscoring the need for a more stable business environment.

The finances of U.S. farmers continued to deteriorate, with 2.32% of all farmland loans in arrears at the end of June, up from 2.15% a year earlier and the highest share since 2013.

Default rates on other agricultural loans accelerated to 1.82% from a recent low of just 0.77% back in 2015 and the highest since 2011.

The other troubling trend was the increasing delinquency rates for credit cards and other consumer loans, which have been gently but consistently rising since 2015.

Consumer delinquencies are still low compared with rates that have prevailed over the last 25 years, giving some comfort to bankers.

But arrears are rising despite the lowest unemployment rate since the 1960s and benchmark interest rates not far above their post-crisis lows.

The gradual increase in arrears suggests consumers may not have the capacity to take on much more debt without running into trouble.

Commercial banks charged off 3.74% of all credit card loans against their reserves at a seasonally adjusted annual rate in the second quarter, the fastest rate of bad-debt write-downs since 2012.

In the last year, the U.S. economy has become increasingly reliant on consumer spending as the trade war and heightened uncertainty have hit business investment.

The rising trend in consumer arrears suggests that may not be sustainable for much longer as a growing number of borrowers struggle to meet payments.

John Kemp is a Reuters market analyst. The views expressed are his own.

Related column:

- U.S. consumer confidence critical to economic outlook (Reuters, May 31)

Editing by Dale Hudson

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