As inflation’s grip tightens, Americans find themselves in a precarious financial dance, juggling income, savings and the increasingly burdensome weight of credit. The Federal Reserve Bank of New York rings the alarm with a report of surging “delinquency transitions,” a term for debts that shift from being regularly paid to past-due. This trend spiked in the third quarter of 2023 across various debt forms, excluding student loans, suggesting a distressing inability of consumers to shoulder their financial commitments — a stark contrast to the economic stability the nation enjoyed during the Trump administration.
Michael Faulkender, the chief economist at the Center for American Prosperity, attributes this to a trifecta of woes: stagnant wages in the face of relentless inflation, depleted savings, and an alarming reliance on credit. With credit card balances over $1 trillion, the American household is sailing into a storm of financial difficulty. This is echoed in the New York Fed’s data, highlighting a conspicuous rise in credit card and auto loan delinquencies, which have climbed to 8% and 7.4%, respectively.
Under the Biden administration, average real wages have decreased 2.1% from the first quarter of 2021 to the third quarter of 2023, according to the Federal Reserve Bank of St. Louis. This decline has driven Americans to dig into their savings, which have dwindled alarmingly from their pandemic peaks.
Jai Kedia from the Cato Institute views the uptick in delinquencies as a grim signal that the economy may not be as robust as some have hoped. Instead, it may indicate that a “hard landing” — an economic downturn many anticipated last year but did not materialize — may have only been postponed.
Unemployment, a jagged recovery, and a juxtaposition of high inflation against aggressive interest rate hikes mar the economic narrative forwarded by the Biden administration. Peter Earle from the American Institute for Economic Research describes the scenario as a significant strain on consumers, characterized by unpaid bills and a slowing economy under the weight of soaring borrowing costs.
🚗💳 In the #US, on-time payments for auto loans and credit cards are taking a hit. Even with unemployment under 4%, delinquencies are climbing fast. #DebtDelinquencies #EconomicIndicator pic.twitter.com/73w2fxwl4h
— ICEBERG FINANCIAL (@iceberg_fin) November 10, 2023
Despite inflation showing signs of deceleration from its peak under Biden, the Federal Reserve has hoisted the federal funds rate to a daunting 5.25-5.5% range, the highest in 22 years, designed to curb inflation but at the expense of more significant pressure on debt repayment.
The government’s stimulus programs, touted as a one-time boon, have fueled consumer spending. However, the windfall has had unintended consequences, as indicated by Kedia, with the difficulty in repaying loans on durable goods rising. This is compounded by the Biden administration’s legislative agenda, including the American Rescue Plan and the so-called Inflation Reduction Act, which have injected billions into the economy with a focus on climate initiatives.
Household debt (cars, credit cards, mortgages) is going through the roof.
Credit card defaults were at 9.5% on the eve of the 2008 financial crisis. Today they are at 9.4% and rising.
Nearly 1 in 5 car payments are now about $1,000 per month. That is a record high. People are… https://t.co/XRmsbjhjx1
— Wall Street Silver (@WallStreetSilv) November 10, 2023
September 2023 marked the fourth consecutive month where real spending outstripped income growth, suggesting a shift toward drawing on savings and borrowing to finance spending. As Earle suggests, the result is a population living beyond its means and exposed to the risk of economic shocks.
The Fox Business report adds a dimension to this troubling picture, with credit card debt surging to $1.08 trillion by the end of September 2023. This is a harbinger of the financial duress households face, as the increase in delinquencies is partly attributed to relaxed lending standards, overextension, and the squeeze of inflation and high interest rates.
Furthermore, the average credit card annual percentage rate (APR) has hit a record high of 20.72%, exacerbating the cost of carrying debt. The actual cost of debt is becoming increasingly demanding for the average American, with long-term interest payments ballooning. The cumulative effect of rising credit card and auto loan debt has propelled total household debt to an astonishing $17.29 trillion, a sobering reminder of the fragility of consumer finances.
The financial health of the American consumer is under siege. Inflation continues to outpace income growth, forcing households to lean more heavily on credit. The resultant rise in delinquencies paints a clear picture of a nation grappling with the enduring effects of economic policy and market forces.