Delinquencies of consumer loans remain low by historical standards but appear vulnerable should the slowdown in the labor market continue.
The percentage of overall consumer loans at commercial banks that became delinquent in the second quarter was 2.75%, according to the Federal Reserve. The rate of delinquencies on credit cards settled at 3% and mortgage delinquencies were subdued at 1.8%.
The ability of American households to maintain loan payments remains solid. But the delinquency rates need to be seen in the context of the response to the pandemic by households and the government.
The drop in credit card delinquencies from 2020 to 2021 coincides with American households having limited opportunities to spend during the pandemic.
At the same time, government assistance programs during the pandemic put cash directly into people’s pockets, making it easier for lower and middle-class households to meet their payments.
The increase in credit card delinquencies since 2021 can initially be explained by the termination of the government’s direct subsidies and the spending spree by American households once the pandemic ended, That excess spending seems to have run its course by 2024.
The takeaway
Whether the delinquency trends continue will depend on the health of the labor market, the inflation rate and household savings still available. All of those will determine the ability of lower- and middle-income families to continue to spend.
We are seeing anecdotal evidence of the difficulties that low-income families are already facing and the impact they are having on the businesses they frequent.
