Delinquency rates on credit cards and auto loans spiked to their highest since the Great Recession, according to a New York Fed and Axios
Delinquency rates on credit cards and auto loans spiked to their highest since the Great Recession, according to a New York Fed and Axios
Delinquency rates on credit cards and auto loans surged to their highest levels since the Great Recession, according to a report from the New York Fed released on Tuesday.
Why it matters: The resilience of the American consumer has been a key factor in the economy's ability to avoid a recession. However, signs of stress on household balance sheets, such as the rise in delinquency rates, are cause for concern in an economy that has been largely resilient to threats.
The increase in delinquency rates suggests that the Federal Reserve's aggressive interest rate hikes are affecting consumers, who are grappling with higher borrowing costs.
"Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels," said Wilbert van der Klaauw, an economic research adviser at the New York Fed, in a press release. "This signals increased financial stress, especially among younger and lower-income households."
In the final months of 2023, an annualized 8.5% of credit card balances and 7.7% of auto loan balances moved into delinquency status, according to the New York Fed's quarterly report on household debt and credit.
However, other types of debt, such as student loans and mortgages, have delinquency rates below pre-pandemic levels.
Overall delinquency rates rose slightly to 3.1% in the fourth quarter, which is still 1.6 percentage points below the pre-pandemic level.
The New York Fed also noted that missed federal student loan payments won't be reported until the end of this year, which is keeping reported delinquency rates low.
The increase in delinquency rates for credit cards and car loans is puzzling given the overall health of the consumer, including a strong labor market and rising real wages.
Researchers at the New York Fed pointed to pockets of overextended consumers and labor market churn as potential factors contributing to higher delinquency rates.
The rise in late payments marks a shift from the pandemic's peak when student loan and mortgage forbearance, along with stimulus payments, drove delinquency rates to historic lows.
Delinquency rates have been creeping up since the expiration of these policies.
Credit conditions are now much tighter, with banks reporting even stricter lending standards in the fourth quarter, according to the Fed's Senior Loan Officer Opinion Survey released on Monday.
"Appetite to make consumer loans (credit card, auto & personal loans) remains very weak and suggests lending growth in this area, that is so important for consumer spending, will soon contract" in annual terms, wrote ING economist James Knightley.
In a blog post published on Tuesday, researchers at the New York Fed noted that consumers with auto loans opened in the past two years are falling further behind compared to those with loans from earlier years.
They theorize that this trend may be due to buyers in these years facing higher car prices and potentially borrowing more at higher interest rates.