In the face of escalating inflation that continues to undermine real incomes, American citizens are increasingly defaulting on their debt repayments, a situation that could potentially lead to a surge in bankruptcy declarations.
The Federal Reserve Bank of New York has reported a significant increase in delinquency transitions, which refer to debts that were previously being serviced but have now fallen into arrears, across all forms of debt, excluding student loans, in the third quarter of 2023. Experts who spoke to the Daily Caller News Foundation have attributed this worrying trend to the adverse economic conditions in the U.S., which have been exacerbated by rising inflation and interest rates, leaving many Americans unable to meet their previous financial obligations.
Michael Faulkender, Chief Economist and Senior Advisor for the Center for American Prosperity, explained to the DCNF, "Consumers pay for things three ways: income, savings and credit. We know that wages have not kept up with inflation over the last 2.5 years and that many households have spent all of the savings accumulated during the pandemic. Therefore, in order to maintain their spending levels, they have been adding to their credit card balances, such that aggregate balances have now eclipsed $1 trillion. Rising credit card debt in a rising interest rate environment with incomes not keeping pace will put more and more households into financial difficulty, resulting in delinquencies."
The New York Fed has noted that delinquency transitions for credit cards and auto loans experienced the most significant increase among all forms of debt in the third quarter, rising to 8% and 7.4% respectively. Credit card debt rose to $1.08 trillion in the quarter, marking a 4.7% increase from the second quarter, when it surpassed $1 trillion for the first time in U.S. history.
According to the Federal Reserve Bank of St. Louis, real wages for average Americans have been on a downward trajectory since President Joe Biden assumed office, declining by 2.1% from the first quarter of 2021 to the third quarter of 2023. As a result, Americans are increasingly dipping into their savings to compensate for the loss in wages. As of September 2023, Americans collectively held $687.7 billion in savings, a significant decrease from more than $1 trillion in May and nearly $6 trillion in April 2020.
Jai Kedia, a research fellow for the Center for Monetary and Financial Alternatives at the Cato Institute, told the DCNF, "It likely indicates that average Americans are not doing well financially. The quarter-by-quarter increase in delinquencies is probably a signal that the economy is not as good as people thought earlier this year rather that the hard landing many predicted last year but never came may simply have been delayed."
An economic soft landing, which refers to a slowdown in market growth that avoids a recession, is not a baseline expectation for the Federal Reserve in its fight against inflation, according to Jerome Powell, Chair of the Fed, following the September Federal Open Market Committee meeting.
Peter Earle, an economist at the American Institute for Economic Research, told the DCNF, "The rise in delinquencies is indicative of increasing strain on consumers. Over the past three-and-a-half years, weve had widespread unemployment, an uneven recovery, and then both the highest inflation and the most aggressive rate-hiking campaign in four decades. Inflation is still substantially elevated. Unemployment is rising faster now, the economy is slowing under the strain of higher borrowing costs, and bills are going unpaid."
Inflation reached a peak of 9.1% under Biden in June 2022 but has since decelerated, albeit remaining elevated, measuring at 3.7% in both August and September, a figure that is significantly higher than the Feds 2% target. In response, the Fed has increased its federal funds rate to a range of 5.25% and 5.50%, the highest level in 22 years, over the course of 11 rate hikes starting in March 2022.
Kedia told the DCNF, "People respond to incentives. The government provided massive amounts of fiscal stimulus that was marketed as a one-time gift. People used this windfall to purchase goods and services perhaps these included down payments on durable items that are now getting difficult to pay back loans on."
The Biden administration has championed several large government spending bills, including the American Rescue Plan, which was signed in March 2021 and provided $1.9 trillion in stimulus checks, debt bailouts, and more. Additionally, the President signed the Inflation Reduction Act, which approved $750 billion in new spending, a significant portion of which was allocated to climate initiatives.
Earle told the DCNF, "In September 2023, for the fourth month in a row, real spending outpaced real income growth. This suggests that a large and growing portion of recent US spending has been drawn from savings and financed by borrowing. Although wages and salaries increased in September 2023, disposable income declined for the third consecutive month, signaling that American consumers have been saving less to support current and future spending. Not only does this mean that they are living beyond their means, but they are tremendously vulnerable to an unanticipated economic shock."
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