How American consumers are feeling the squeeze, in 4 charts

Yahoo

2 days ago

The lingering effects of high inflation coupled with high interest rates have made it harder in recent years for many Americans to get ahead financially.
The hits just keep coming.
A raft of policy moves from the Trump administration, including particularly steep tariffs that could cause prices to rise, and the whipsaw approach being taken, have stoked uncertainty and driven down sentiment to some of the lowest levels on record.
That combination of higher prices, uncertainty and pessimism can be outright noxious as pullbacks in consumer and business spending can have cascading negative effects on the labor market and the broader economy.
The consumers who power the US economy with their spending have been resilient to date — but they're being increasingly spread thin.
Debt loads are climbing, as are defaults, and indicators of consumer strain are flashing red: For example, an increasing number of people are paying for their groceries in installments.
Among those feeling the biggest squeeze are student loan borrowers who have been mired in confusion since the pandemic and amid two presidential administrations' opposing desires for those outstanding balances. The prospects of sharply reduced monthly payments and, especially, debt forgiveness have faded; instead, those who have fallen behind on payments not only are seeing their credit scores tank as a result, but they also risk having their wages garnished by the government.
Here's a quick look at how household finances are becoming increasingly frayed:
The Covid-19 pandemic upended the US economy — but in the process, some Americans were able to swiftly pay down their debt and sock away money in savings.
Stimulus checks, payment pauses (on student loans and rents, in some cases), cutbacks in travel and other discretionary spending, as well as a $430 billion 'refinancing boom' helped give Americans plenty of dry powder and a leg up on their debts.
The shored-up savings helped to power a post-pandemic recovery, and credit card balances shot up accordingly.
The record-setting balances, on their own, weren't necessarily a troublesome indicator. Credit card use rises as the population grows, as more people shop online, and as the economy and wage gains remain strong.
However, the post-pandemic recovery included a bout of decades-high inflation that the Federal Reserve tried to combat with decades-high interest rates.
Where the rubber meets the road is how people were managing those rising and costly debts.
By the end of last year, Americans were having greater difficulty in managing rising debt and, in some cases, hadn't been that overextended since the aftermath of the Great Recession.
The share of households becoming seriously delinquent on their auto loans and credit cards hit 14-year highs.
Moreover, at the start of this year, it was highly expected that student loan delinquencies would worsen.
The 3.5-year payment pause ended in September 2023; however, an additional provision under the Biden administration provided a one-year 'on-ramp' where borrowers were shielded from the negative effects of a missed payment. That grace period ended September 30, 2024, and missed payments started hitting credit reports.
Student loan delinquencies jumped to 7.74% from 1% following the ending of a pandemic-era pause of reporting past-due loans on credit reports, according to the Federal Reserve Bank of New York's first-quarter Household Debt and Credit Report.
'Adding student loans back into the mix certainly looks like it was a bridge too far for a lot of people, when it comes to their ability to pay the bills down,' Matt Schulz, chief credit analyst at LendingTree, said in a recent interview with CNN.
And when the loans land into the serious delinquency territory (when they're late by 90 days or more), that's a major knock on people's ability to achieve other goals: Defaulted borrowers with credit scores above 620 saw average negative score changes north of 140 points, and those with scores north of 720 saw drops of 177 points on average, New York Fed research showed.
In addition to the credit score impacts, those who have defaulted on their federal student loans will likely see their wages garnished by the Department of Education.
'The money that has to go to student loan payments now is money that can't go to paying off credit card debt or building an emergency fund or working toward other financial goals that build a stable foundation,' Schulz said.
Buy Now, Pay Later installment plans have become more widely available and adoption rates have increased as people of all ages — but especially younger adults — have grown more comfortable incorporating them into their shopping habits.
At their best, Buy Now, Pay Later loans can serve as an alternative to credit cards and are used by consumers who are seeking more flexible payment options, who want to overcome a tight financial spot, or who are looking to smooth out some bigger transactions to better meet their budgets.
But it's the 'at their worst' part where there's greater cause for concern.
Buy Now, Pay Later comes with such ease that people can quickly spend well beyond their means — especially if they start stacking multiple installment loans at the same time. A Bankrate survey conducted in May found that nearly half of all BNPL users experienced at least one problem, and overspending topped the list.
In recent months, however, it's what people have been buying with BNPL loans that have raised red flags among economists and analysts.
One in four BNPL users say the installment loans to buy groceries, according to surveys conducted in April and May by LendingTree. That's up from 14% from a year before.
There was a spike in these types of purchases when inflation hit 40-year highs back in 2022.
'Those loans have traditionally been thought of for clothing and gaming consoles and furniture and things like that,' Schulz said. 'But when people are using them for something as basic and fundamental as groceries, it is certainly concerning.'
'That hints that people are looking for whatever way they can to extend their budgets in the face of higher interest rates, higher prices at the grocery store and elsewhere, student loan repayments and just other economic headwinds people are facing,' he added.
The building economic headwinds are weighing more heavily on Americans.
Consumer sentiment has been freefalling in recent months, and in May remained at a near-record low, according to the University of Michigan's closely watched indicator of how people are feeling about the economy.
Since 1952, when the university started tracking how Americans felt about the economy, there have been nearly a dozen recessions, several oil price shocks, a few wars, a couple of inflationary episodes, a major financial crisis and a global pandemic.
Turns out, a massive trade war nearly trumps all.
Trump's sweeping and steep tariffs and other policy shifts have stoked recession fears and sent sentiment readings south every month this year. The university's index of consumer sentiment is down almost 30% since January.
The biggest concern for the economy is how people and businesses manage those sour feelings and to what extent they change behaviors.
A pullback in spending and business investment could ultimately lead to a contraction in the economy and rising unemployment.
'If [consumers are] watching the headlines to shape their sentiment, they're most likely feeling like deer in headlights — unable to move for fear the car may swerve at the last minute,' Elizabeth Renter, NerdWallet's senior economist, wrote in commentary on Friday. 'Economic policy is in a state of near-constant flux, and with that, so too are consumer feelings about the economy.'
The latest Commerce Department data, however, indicated that Americans' income growth was stronger than expected in April and that people bolstered their savings accounts. That could ultimately help people guard against negative effects of the tariffs yet to come, noted Gary Schlossberg, market strategist at Wells Fargo Investment Institute.
'Solid income growth and a more elevated saving rate should help cushion households from the brunt of inflation's tariff-related increases in coming months, resulting in a second-half 'soft patch' for the economy rather than a bona fide recession,' he wrote last week.