There are growing signs that Americans are struggling to make payments, and Wall Street is starting to worry.
About 9.1% of credit card balances were delinquent in the past year, the highest rate in more than a decade, according to a recent survey by the Federal Reserve Bank of New York.
The same survey found that 8% of auto loan balances are delinquent, the highest rate since 2010.
Bank executives He told the Wall Street Journal Over the weekend, there were reports that rising food prices and high credit card interest rates are making people increasingly burdened with delinquency.
Citigroup Inc. Chief Financial Officer Mark Mason told bankers at a Barclays banking conference last week that customer balances were growing at a higher rate than normal despite rising delinquencies. The increased spending was mainly coming from Citi's wealthier clients, he said.
Russ Hutchinson, chief financial officer at auto loan company Ally Financial, told The Wall Street Journal that the company has seen an increase in late payments and charge-offs on auto loans (when lenders decide they won't be able to collect on a loan and write off the debt as a loss).
“What we're finding is that if people fall behind on their payments in this situation, it's going to be much harder for them to get out of it,” TD Cowen analyst Moshe Orenbook told The Wall Street Journal.
“Generally, this is a bigger problem for people in the bottom half of the income bracket.”
The U.S. economy remains a top issue in the 2024 presidential election for voters who face a shaky jobs market after three years of rampant inflation under the Biden administration, raising fears on Wall Street.
Ally said delinquencies were about 0.2% higher than expected and net loan loss provisions were 0.1% higher than expected.
Ally's Hutchinson said the company's clients were “struggling with the rising cost of living and now a worsening employment situation”.
Citigroup's shares have fallen nearly 5% in the last month, while Ally Financial's shares have plummeted more than 20% in the same period.
Shares of Discover Financial Services Inc. fell 1% last month, a sign of a slowdown in consumer spending.
Lawrence Spring, founder of Long Island-based Mitlin Financial, said the delinquency is an aftereffect of the COVID pandemic, and “people aren't spending, but they feel like they have an abundance of cash because of the pandemic.” [government] the assistance provided.”
“Once things started reopening, they started spending without realizing how much debt they were racking up and how much interest they were paying on that debt,” Sprang told the Post.
The average interest rate on a 60-month loan for a new car was 8.2% as of May, up from 5.3% in 2019, according to data from the Federal Reserve.
Having a vehicle to get around is so important that car payments are one of the last bills people stop paying.
“As Taylor Swift sings in her song, 'It's me. It's about me,'” Ted Jenkin, co-founder and CEO of Oxygen Financial, an Atlanta-based financial planning firm, told The Washington Post.
“Americans today have a hard time delaying gratification and continue to spend money even when they can't afford it.”
The Federal Reserve is scheduled to meet later this week, and policymakers are likely to announce an interest rate cut — a move that has long been expected as inflation has retreated in recent months from a 2022 high of more than 9%.
The central bank has come under criticism for not cutting interest rates sooner, especially in light of recent data showing a significant weakening of the labor market.
Economic data reports on retail sales, weekly jobless claims, housing starts and industrial production are due this week.
