Editor's note: Consumers have been struggling with high inflation for the past two years. Now, millions of Americans are about to take on yet another burden. And it could have serious consequences... even in a bull market. Joel Litman – founder of our corporate affiliate Altimetry – is joining us to explain why. In this piece from Altimetry Daily Authority, he covers why a big change for borrowers could spread to the rest of the economy...
It might be time to revisit your budget...
For most of the pandemic, the U.S. government found ways to keep money in consumers' pockets.
If you kept up with the headlines back then, you can probably recite the list by heart. Stimulus packages kept spending strong, companies happy, employment high, and interest rates low.
It was the opposite of what would happen in a recession. And while it propped up the economy for years, we're now seeing a key sign that the "easy money" era is over...
Starting October 1, student-loan payments will resume for almost 27 million borrowers. The average borrower owes about $400 per month. So many consumers will have to make some tough budgeting choices.
These folks haven't had to worry about student loans for the past three years, which means this will be a big adjustment. Analysts believe more households could fall behind on credit-card and other loan payments as a result.
The macroeconomic environment is getting worse across the board. Today, we'll dive into why this change is adding stress to the already troubled U.S. consumer... and why the effects could be far-reaching.
Consumer balance sheets were looking great...
And the same was true for corporate credit.
Starting in March 2020, when the government paused student-loan payments, delinquency rates started falling for almost every form of consumer credit. Many rates trended toward record lows.
For instance, credit-card delinquency rates fell from nearly 10% in mid-2020 to as low as 7.5% in September 2022. Auto-loan delinquencies fell from more than 5% to less than 4%.
Student-loan delinquency rates fell the most. They had been above 11% for most of the 2010s. By late 2022, they had dropped below 2%. Take a look...
Unfortunately, that trend couldn't last forever. Times are getting tougher for borrowers, including those with student loans.
Again, before the pandemic, more than 11% of student-loan borrowers were already more than 90 days late on their payments. Economists and Bank of America expect that pattern to pick right back up when the pause ends.
That will almost immediately add $167 billion in delinquent balances back to the U.S. economy.
The kicker is, rising delinquency rates will put pressure on everything else...
When student-loan payments were paused, it drove delinquency rates down. So it makes sense that as those payments pick up, so will delinquency rates.
This is going to put pressure on the entire economy. It will send other types of loan delinquencies higher... And it will hurt retail businesses. As folks spend more on debt repayments, they'll have less money for discretionary spending.
Keep an eye on all kinds of consumer delinquency rates in the coming months. As they start rising, credit issues will worsen. We may even see the retail landscape deteriorate.
These are all signs that we're not out of the woods yet.
Regards,
Joel Litman
Editor's note: Joel called the crashes of both 2008 and 2020. Now, he's pointing to a looming national disaster – and an unlikely source of the most reliable potential gains of the next three to five years. On Wednesday, September 27, he steps forward to reveal the crisis warning he has given some of the biggest money managers in the business... and a tool he has waited 20 years to share with the world. Click here to get the full details.
Further Reading
"Customers are increasingly spending on what they need more than big-ticket items that they might want to buy instead," Corey McLaughlin writes. Inflation and consumer debt are inflicting pain on the retail sector. We can see it in some of the latest numbers... Get the full story here.
Corporate debt is another big problem today. Usually, credit investors can recover much of their initial investment even when a company goes bankrupt – but that's changing now. And soon, we could see the kind of negative bond sentiment that creates a wave of beaten-down opportunities... Read more here.