Consumer Stress on the Rise

September 14, 2023

Source: New York Fed Consumer Credit Panel/Equifax Source: New York Fed Consumer Credit Panel/Equifax

U.S. households are starting to show increasing financial stress as outstanding consumer loan balances continue to rise. Although American consumers were able to withstand the economic difficulties of the pandemic, missed payments have increased for most types of debt. Many households took advantage of federal stimulus payments and forbearance programs for student loans and other debt to build up savings and paid down credit cards and other loans during the pandemic. Much of that has reversed course as consumers resumed more normal spending patterns, including travel and entertainment.

Today’s Chart of the Week highlights the change in newly delinquent payments (at least 30 days late) for various consumer loan debt. Aggregate delinquency rates were roughly flat in the second quarter of 2023. The overall delinquency rate remains low by historical levels at 3.18%; however, the share of debt that became delinquent last quarter is rising for most debt types, including credit cards and auto loans.1

Rising debt balances will likely present challenges for some borrowers. Total household debt balances increased by $16 billion in the second quarter of 2023, according to the New York Federal Reserve’s (Fed) Center for Microeconomic Data. Credit card balances saw the largest increase of $45 billion, the seventh consecutive quarter of year-over-year growth. Credit card balances recently surpassed the $1 trillion threshold in nominal terms for the first time in the series history.  Americans owe $12 trillion on mortgages, $1.58 trillion on auto loans and $1.6 trillion on student loans.

Student loan delinquencies fell when the student debt relief plan was enacted in 2020. These loan payments have remained suspended, and interest rates were placed at 0%. Beginning next month, borrowers will resume payments on their federal student loans after more than three years. The end of the payment pause will likely lead to weaker performance for the overall student loan market and add additional financial strain for many student loan borrowers.

Along with rising debt balances, interest rates on consumer debt are also rising. Elevated interest rates have made consumer debt more expensive, putting pressure on household budgets. As persistent inflation has eroded household savings, U.S. consumers have increasingly turned to credit cards to manage expenses, leading to ballooning credit card balances and exacerbating an already stressful consumer environment.

Key Takeaway

Credit performance on consumer debt is likely to deteriorate as consumers exhaust their savings. Household leverage has steadily risen from pandemic lows as borrowers draw down excess savings and rely on credit cards to fund the gaps. Collateral performance will likely weaken for more credit-sensitive asset types such as subprime auto and consumer loan asset-backed securities (ABS). Student loan delinquencies are expected to rise with the resumption of student loan payments, putting pressure on household finances as borrowers prioritize loan payments.

While the consumer still faces challenges, spreads on some securitized consumer loans look attractive. Asset-backed securitizations benefit from short deleveraging structures and solid credit enhancement levels which have improved since the great financial crisis. I prefer shorter-duration high-quality paper tied to prime borrowers. Wider spreads and higher all-in yields are attractive at the top of the capital stack.      



1Federal Reserve Bank of New York – Center for Microeconomic Data; August 2023

Tags: Consumer spending | Student loan debt | Credit card debt | Interest rates | Consumer loan ABS

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