Rising household debt and shrinking incomes are setting the stage for a recession, top economist says

• The US looks poised to enter a recession, thanks to troubling trends in household finances.
• Economist David Rosenberg pointed to rising debt levels and shrinking incomes among American households.
• Those are financial imbalances that could mean a recession is on the way, he suggested.

The US still looks poised to enter a recession, as rising debt and shrinking incomes are setting the economy up for a downturn.

That's according to David Rosenberg, a top economist and the founder of Rosenberg Research who's been warning for months that the US looks like it is headed for an economic contraction.

In a recent note to clients, Rosenberg said there were a number of "imbalances" that could throw off the economy from its current growth streak.

Household debt, for one, is on the rise, with a record $17.8 trillion worth of debt recorded among US households in the fourth quarter, according to Federal Reserve data. Debt per capita, another measure of how leveraged households are, also reached an all-time high of $62,000 — around 17% higher than levels recorded prior to the 2008 financial crisis, Rosenberg noted.

More Americans also appear to be falling behind on their bills. The share of credit card loans that recently transitioned into serious delinquency rose past 7% in the second quarter, up from 5% the prior period. Meanwhile, the share of auto loans that transitioned into serious delinquency rose 2.88%, up from 2.41% the prior quarter, according to the central bank's latest Household Debt and Credit Report.

When combined, outstanding credit card and auto loan debt amount to around $2.8 trillion, representing a larger pool of debt than was seen in the subprime mortgage crisis, Rosenberg said.

"This is no small matter, even if this cycle won't lead to any financial contagion or banking sector fiascos. You don't need a disaster to generate a classic NBER-defined recession," he added.

Meanwhile, household incomes are shrinking, creating another source of pressure on American consumers. Real disposable personal income growth has eased to just 1% on a year-over-year basis as of June, according to data from the Commerce Department, down from yearly growth of over 5% recorded in June of last year.

The personal savings rate has also been dragged down, falling to 3.4% in June, down from the average 8% savings rate recorded prior to the pandemic.

"If this measure of consumer behavior ever does pull a Bob Farrell mean-reversion, we will be in a nasty recession unless somehow work-based incomes do the near-impossible and re-accelerate in the face of a rising jobless rate," Rosenberg said.

Markets have been increasingly concerned about the risk of recession, particularly amid recent weakening in the labor market. The economy added fewer jobs than expected in July, while the unemployment rate spiked to 4.3%, the highest jobless rate seen since the pandemic.

Rosenberg has predicted that the unemployment rate will continue to rise through the end of the year as businesses continue to struggle financially. The jobless rate could end 2024 around 5%, he previously told Business Insider, though his forecast assumes the US economy will enter a recession.