Board of Governors of the Federal Reserve System

2. Borrowing by Businesses and Households

Vulnerabilities from business and household debt remained moderate

The balance sheet conditions of businesses and households were stable in the aggregate since the last report. The level of total private nonfinancial-sector debt continued its moderate decline in real terms and relative to GDP, with the debt-to-GDP ratio reaching its lowest level in two decades (figure 2.1). Trends in both the household and business sectors contributed to the decline in the overall debt-to-GDP ratio.

Business debt-to-GDP (figure 2.2, blue line) and gross leverage of publicly traded corporations edged down but remained near the upper part of their respective historical ranges. Interest coverage ratios (ICRs)—defined as the ratio of earnings before interest and taxes to interest expense—improved slightly and remained at moderate levels, partly reflecting stable earnings. However, for private firms, some signs of weakness remained, including ICRs that were at the lower end of their historical ranges.

The household debt-to-GDP ratio continued to tick downward and remained near 20-year lows (figure 2.2, black line). Homeowners have solid equity cushions buoyed by high house prices. Many households also continued to benefit from lower interest rate payments associated with mortgages that were originated or refinanced several years ago, resulting in aggregate debt-service-to-income ratios that are below pre-pandemic levels. Delinquency rates for credit cards and auto loans were largely unchanged at levels somewhat above their historical medians, due largely to delinquencies of nonprime borrowers.

These vulnerabilities suggest that a sharp downturn in economic activity would depress business earnings and household incomes and reduce the debt-servicing capacity of smaller, riskier businesses with already low ICRs as well as households that are financially stretched.

For additional context, table 2.1 shows the amounts outstanding and recent historical growth rates of different forms of debt owed by nonfinancial businesses and households as of the fourth quarter of 2024.

Table 2.1. Outstanding amounts of nonfinancial business and household credit

Business debt vulnerabilities remained moderate

Nonfinancial business debt adjusted for inflation fell modestly in the second half of 2024 (figure 2.3). Traditional sources of debt, such as corporate bonds and bank-intermediated loans, have continued to grow at a modest pace. Net issuance of risky debt—defined as issuance of speculative-grade bonds, unrated bonds, and leveraged loans minus retirements and repayments—was positive in the fourth quarter of 2024, driven by institutional leveraged loans (figure 2.4). Private credit continued to grow quickly and now constitutes about 9 percent of total outstanding nonfinancial corporate debt.

Record bond issuance at low borrowing costs both before and in the aftermath of the pandemic has led to elevated levels of outstanding borrowings for large public companies, but robust earnings and ample cash buffers have limited debt-servicing vulnerabilities. Gross leverage—the ratio of debt to assets—of all publicly traded nonfinancial firms fell in the fourth quarter of 2024 (figure 2.5) but remained high relative to history, though significantly lower than record highs seen at the onset of the pandemic. Net leverage—the ratio of debt less cash to total assets—also edged downward and remained near the middle of its historical distribution. Nonetheless, the pass-through of higher interest rates into debt-servicing costs continued to be muted by the large share of long-term, fixed-rate liabilities. For public firms in aggregate, the ICR increased since the November report and remained high compared to its historical distribution. The median ICR for non-investment-grade public firms rose above 2 in the fourth quarter of 2024, indicating that firms are generally able to service their debt with sufficient headroom (figure 2.6). However, while the fraction of debt maturing in the next year remained low, approximately 15 percent of investment-grade and 27 percent of high-yield bonds are expected to mature between one and three years from now, indicating that the pass-through of higher interest rates into debt-servicing costs may increase if borrowing costs stay elevated.⁵ The 12-month trailing corporate bond default rate continued to be near the median of its historical distribution. Expectations of year-ahead defaults were elevated relative to their history.

The vulnerabilities of leveraged loans remained above historical norms. For leveraged loan borrowers, gross and net leverage ratios declined modestly but remained above their historical medians since 2016. The share of newly issued loans to large corporations with debt multiples—defined as the ratio of debt to earnings before interest, taxes, depreciation, and amortization—greater than 4 rose slightly in 2024 compared to 2023 but remained near its lowest level in the past decade (figure 2.7). For leveraged loan borrowers, gross and net leverage ratios declined modestly but remained above their historical medians since 2016. The median ICR for leveraged loan borrowers increased slightly but stayed near its historical lows. ICRs of smaller and riskier firms, including leveraged loan borrowers, are sensitive to interest rate changes due to their high leverage, high use of floating-rate loans, and short-term debt maturity structure. The volume-weighted default rate on leveraged loans stayed well below its historical median (figure 2.8, black line). However, defaults including distressed exchanges, which reflect the number of defaults and distressed loans that have been renegotiated between the borrower and the lender, continue to be elevated relative to history (figure 2.8, blue line).

Privately held firms, which tend to be small or middle market, have less access to capital markets and primarily borrow from banks, private credit funds, and other sophisticated investors (such as insurance companies). While private firms account for roughly 60 percent of the total outstanding debt of U.S. nonfinancial firms, data for these firms are not as comprehensive as those for public firms. Some firms in this group may be less well positioned to weather a large shock. Based on available data, the ICR for the median firm in this category continued its downward trend over the previous few years and was slightly below its pre-pandemic level, as higher interest rates have contributed to reduced earnings and increased the cost of debt servicing. The average ICR at issuance for private credit borrowers, which comprise almost exclusively small and middle-market private firms, increased but remained low around a value of 2, indicating debt-servicing capacity in the range of below-investment-grade public firms. Aggregate gross and net leverage of private firms were similar to the previous report and remained near their historical medians.

Credit availability to small businesses tightened and delinquencies remained above pre-pandemic levels

Interest rates on small business loans have been largely stable in recent months and remained near the top of the range observed since 2008. Credit availability has continued to tighten for small firms in recent months. According to the February 2025 National Federation of Independent Business's Small Business Economic Trends Survey, the share of firms that borrow regularly has fallen to its lowest value since May 2022.⁶ Data from the Small Business Lending Survey showed that banks continued to tighten credit standards.⁷ That said, measures of small business loan originations edged up through January 2025. Credit quality has improved over the past few months, as both short-term (up to 90 days) and long-term (more than 90 days) delinquency rates ticked down from the increase observed in the second half of 2024, though they remained above their pre-pandemic levels.

Vulnerabilities from household debt remained moderate

Outstanding household debt adjusted for inflation has been little changed since the November report (figure 2.9). The ratio of total required household debt payments to total disposable income (the household debt service ratio) was virtually unchanged since the last report and remained slightly below pre-pandemic levels. Most household debt has fixed interest rates, and the higher interest rate environment of the past few years has only partially passed through to household interest expenses.

Mortgage credit risk remained low

Mortgage debt accounted for roughly three-fourths of total household debt. Housing leverage—measured as outstanding mortgage loan balances relative to home values—continued to sit well below previous peaks (figure 2.10). When measured relative to market prices for house values (figure 2.10, the blue line), outstanding mortgage balances have remained subdued. Outstanding mortgage loan balances relative to an estimate of home values from a model using rents and other market fundamentals were somewhat higher but remained far below earlier peaks (figure 2.10, the black line). The overall mortgage delinquency rate remained at the lower end of its historical distribution in the second half of 2024, while the share of mortgage balances in loss-mitigation programs increased, albeit from low levels (figure 2.11). Delinquency rates remained subdued due to large home equity cushions (figure 2.12) and strong underwriting standards.

New mortgage extensions rose slightly for borrowers with a prime credit score (the group with the largest share) in the fourth quarter of 2024 but declined slightly for borrowers with near-prime or subprime credit scores (figure 2.13). In the second quarter of 2024, the early payment delinquency rate—the share of balances becoming delinquent within one year of mortgage origination—remained somewhat above the median of its historical distribution.

Consumer loan balances adjusted for inflation remained high by historical standards

Consumer debt accounted for the remaining one-fourth of household debt and consisted primarily of student, auto, and credit card loans. Auto and student loan balances were broadly unchanged in inflation-adjusted terms relative to the last report, though credit card balances had somewhat increased (figure 2.14).

The average maturity of auto loans at origination for used cars was near historical highs for borrowers with a nonprime credit score (figure 2.15). On balance, longer-maturity loans tend to have higher default risks, partly because such loans have higher risk of falling deep into a negative equity position, which can drive consumer defaults. The share of auto loans in delinquent status was largely unchanged from the last report and stood at a level somewhat above its historical median (figure 2.16), due in part to a more significant rise in delinquencies in 2023 and early 2024 among borrowers with a subprime credit score. The increase in subprime auto loan delinquencies over the past couple of years may be due to higher car prices and higher interest rates, combined with loosened underwriting standards and elevated loan maturities.

Aggregate inflation-adjusted credit card balances grew moderately for all borrower types over the second half of 2024 (figure 2.17). Credit card delinquency rates inched down in the fourth quarter of 2024 after reaching their highest level since 2010 in the previous quarter following looser underwriting standards during the pandemic era and large growth in real revolving credit (figure 2.18). The overall increase since early 2022 was attributable primarily to elevated delinquencies among borrowers with a nonprime credit score.

The on-ramp period for student loan payments, which prevented loans from being reported as delinquent to credit bureaus, ended in September 2024, and student loan delinquencies reflected on borrower credit records can be expected to rise in the coming quarters. While student-loan borrowers have not yet shown much greater difficulty in meeting their non-student-loan debt payments relative to the overall population, some student loan borrowers may find it more difficult to keep up payments or to service other forms of debt.

 

References

 

 5. The fraction of outstanding debt maturing over the next year increased with respect to the previous year but remained low, with 8 percent of investment-grade and 14 percent of high-yield bonds maturing over the coming year. Return to text

 6. This survey's data are available on the National Federation of Independent Business's website at https://www.nfib.com/surveys/small-business-economic-trends. Return to text

 7. This survey's data are available on the Federal Reserve Bank of Kansas City's website at https://www.kansascityfed.org/surveys/small-business-lending-survey/. Return to text