Americans increasingly default on debt as inflation continues to put ‘strain on consumers’

Americans are increasingly falling behind on their debt payments as inflation continues to erode real incomes, threatening to push many consumers into bankruptcy.

Delinquency transitions, debts that were previously being paid but are no longer being paid despite outstanding obligations, rose sharply in the third quarter of 2023 across all forms of debt except student loans. seconds at the Federal Reserve Bank of New York. Poor economic conditions in the U.S. linked to rising inflation and interest rates have made it harder for Americans to pay back obligations they once could afford, according to experts who spoke to the Daily Caller News Foundation .

“Consumers pay for things in three ways: income, savings and credit,” Michael Faulkender, chief economist and senior adviser at the Center for American Prosperity, told DCNF. “We know that wages have not kept up with inflation over the past 2.5 years and that many households have spent all their savings during the pandemic. So to maintain their spending levels, they have have been adding to their credit card balances, so that aggregate balances have now eclipsed $1 trillion.Credit card debt rising in a rising interest rate environment with incomes not keeping up rate will put more and more households in financial difficulty, leading to defaults.”

Delinquency transitions for credit cards and auto loans saw the largest increase among debt forms in the third quarter. going up to 8% and 7.4%, respectively, according to the New York Fed. Credit card debt rose to $1.08 trillion in the quarter, up 4.7% from the second quarter, when overcome $1 trillion for the first time in US history.

Real wages for the average American have declined since President Joe Biden took office, sinking 2.1% from the first quarter of 2021 to the third quarter of 2023. seconds at the Federal Reserve Bank of St. Louis. Americans are more and more spinning to their savings to make up the difference in lost wages, with Americans collectively holding on $687.7 billion in savings by September 2023, compared to more than $1 trillion in May and nearly $6 trillion in April 2020.

“It probably indicates that average Americans are not doing well economically,” Jai Kedia, a researcher at the Cato Institute’s Center for Monetary and Financial Alternatives, told the DCNF. “The quarterly increase in delinquencies is probably a sign that the economy is not as good as people thought earlier this year, rather than the hard landing that many predicted last year but never saw arrived may simply have been delayed.”

An economic soft landing it refers to to a slowdown in market growth that avoids a recession, rather than a hard landing, which would translate into a recession, slowing economic growth but also ultimately reducing inflation. After the Federal Open Market Committee meeting in September, Fed Chairman Jerome Powell said a soft landing was not a baseline expectation for the Fed in its fight against inflation.

And the credit card (cc) problem extends across age groups; all groups seem to rely on credit cards to go from check to check, but even cc isn’t enough anymore; overall this is the fastest rise in cc crime since the GFC – something will break…. pic.twitter.com/Cyeu91VAn5

—EX Antoni, Ph.D. (@RealEJAntoni) November 7, 2023

“The increase in crime is indicative of a growing strain on consumers,” Peter Earle, an economist at the American Institute for Economic Research, told the DCNF. “For the past three and a half years, we’ve had widespread unemployment, an uneven recovery, and then the highest inflation and the most aggressive rate hike campaign in four decades. Inflation is still substantially high. Unemployment is rising faster now, the economy is slowing under the strain of higher borrowing costs and unpaid bills.”

inflation reached the top under Biden to 9.1% in June 2022, but has slowed since then while remaining high, measuring 3.7% in both August and September, far from the target of 2% of the Fed. In response, the Fed has get up its federal funds rate to a range of 5.25% and 5.50%, the highest point in 22 years, over 11 rate hikes starting in March 2022.

“People respond to incentives,” Kedia told the DCNF. “The government provided massive amounts of fiscal stimulus that were marketed as a one-time gift. People used this windfall to buy goods and services, perhaps including down payments on durable goods that are now hard to pay off loans.” .

The Biden administration has pushed through a series of large government spending bills, included the US Rescue Plan signed in March 2021 that provided $1.9 trillion in stimulus checks, debt bailouts and more. The president also signed the Inflation Reduction Act, which approved $750 billion in new spending, much of it earmarked for climate initiatives.

“In September 2023, for the fourth consecutive month, real spending outpaced real income growth,” Earle told the DCNF. “This suggests that a significant and growing share of recent US spending has been taken out of savings and financed by borrowing. Although wages and salaries rose in September 2023, disposable income decline for the third month in a row, indicating that US consumers have been saving less to support current and future spending.This not only means that they are living beyond their means, but that they are tremendously vulnerable to an economic shock unforeseen”.

The White House did not respond to a request for comment from the DCNF.

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