NY Fed: COVID-19 forces first decline in household debt since 2014

The Federal Reserve Bank of New York reported Thursday that the COVID-19 pandemic had led to pay-downs of household debt in the second quarter of 2020, leading to the first quarter-over-quarter decline since 2014. Yahoo Finance’s Brian Cheung joins Zack Guzman to discuss.

Video Transcript

ZACK GUZMAN: We got an interesting new update from the Federal Reserve Bank of New York and a new study looking at household debt there falling for the first time in six years. Americans springing into action, I guess, with the stimulus that they got.

And for more on this one, I want to bring on Yahoo Finance's Brian Cheung. And, Brian, it looks like whether or not it's a stimulus-- it might be the stimulus-- more Americans paying down debt.

BRIAN CHEUNG: Well, some pretty interesting data from the New York Fed. They have what they call the Consumer Credit Panel. This uses national data with some help from Equifax, the credit-reporting agency. And the headline number was really that the amount of household debt-- this is everything including mortgages, car loans, student loans-- actually fell in the second quarter, fell by $76 billion dollars to-- or sorry, $34 billion to $14.3 trillion as of June 30.

The most notable declines in those types of debt categories was in credit-card spending. This is something that we had already heard from the likes of JPMorgan Chase, for example, where balances fell by $76 billion dollars to $820 billion. But we saw some declines across the board in other categories as well.

Something interesting too is that the delinquencies for those types of household credit also fell. So when you look at, for example, things like mortgage balances, the amount of forbearance actually had helped delinquency rates come down. The concern, though, is that the underlying fundamental health of these households is not that great and that the forbearance was likely due to the CARES Act support, which means that if that forbearance were to be suspended, if the national moratorium on evictions were to be suspended, that maybe all of those households would ultimately end up foreclosing on their homes. So not necessarily a positive thing that the forbearance rates are helping those delinquency rates go down but something definitely worth watching.

Broadly, it does seem like, as you mentioned, Zack, some of the stimulus payments, for example, those $1,200 checks that went out in that first round of CARES Act funding, likely helped people pay down their debt during the second quarter.

ZACK GUZMAN: Yeah, the steepest decline in credit-card balances that we've seen since the history of the data was reported. But also we got an interesting update from the Chicago Fed, not to be outdone by the New York Fed-- you know how these things go-- saying that there are to be expecting some lasting scars here in terms of the unemployment rate here through the pandemic. What did they have to add?

BRIAN CHEUNG: Yeah, always a competition between these Federal Reserve banks dropping data on the same day, but the Chicago Fed, as you mentioned, with an analysis out saying that reshuffling of workers across industries-- we were just talking about this with Indeed's Nick Bunker in the last block-- but the reshuffling of where people are working actually could have a lasting, scarring effect on the labor market. We've heard Chairman Powell talk about these types of concerns. The Chicago Fed estimating that the total effect of these changes to the labor market as a result of the COVID-19 crisis could be about 2% to the unemployment rate, which would suggest that it could be quite difficult for the Federal Reserve and economic policymakers to get the United States unemployment rate, at least as a headline, back down to that 3.5% 50-year low that we had seen prior to this crisis.

ZACK GUZMAN: All right, the latest there. And again, we'll be watching when we get that jobs number tomorrow right here on Yahoo Finance. Coverage beginning at 8:30 Eastern Time.