Signs of Stress in Consumer Credit Quality

Consumers are starting to feel the pressure despite the historically low unemployment rate, according to a recent note by Renaissance Macro Research. The report highlights a modest decline in credit quality for credit cards and auto loans, based on the Federal Bank of New York's latest household debt and credit report.

Auto Loans and Credit Card Balances

Neil Dutta, head of economics at RenMac, points out that the portion of auto-loan balances that are seriously delinquent, meaning payments are at least 90 days late, has surged to 2.53%. This is the highest level since the third quarter of 2010. Additionally, seriously delinquent credit-card balances have risen to 5.78%.

Consumer Debt Stress

Interestingly, mortgages appear to be less affected by payment struggles compared to credit cards and auto loans. The chart below from RenMac demonstrates the rise in seriously delinquent credit-card balances (indicated by the yellow line) and late auto-loan payments (represented by the gray line).

Potential Impact of Unemployment

Neil Dutta raises concerns regarding the non-linear nature of delinquencies, drawing parallels with unemployment. If there is a significant increase in unemployment, credit quality is likely to further deteriorate.

As consumers face difficulties meeting their financial obligations in terms of credit card and auto loan payments, it becomes increasingly important to closely monitor these areas of consumer debt.

U.S. Unemployment Rate Increases to 3.9%

The U.S. unemployment rate rose to 3.9% in October, up from 3.8% in September, according to a recent report from the Department of Labor. Despite this increase, the unemployment rate remains relatively low. However, the growth of jobs in the labor market slowed down last month and the Federal Reserve continues to maintain interest rates at a high level, which Fed Chair Jerome Powell considers restrictive.

Rise in Delinquency Rates among Younger Age Cohorts

According to Dutta, there has been a noticeable increase in delinquency rates among younger age cohorts. However, the percentage of overall debt balances that are seriously delinquent stands at just 1.28%, significantly lower than the pre-pandemic rate of 2.38%. It is worth noting that mortgage loan balances that are seriously delinquent remain at an all-time low.

Consumer Financial Health and Stock Market Performance

The stock market closely monitors the financial health of consumers due to their significant contributions to the U.S. economy. Despite the Federal Reserve's decision to keep its benchmark rate at the highest level in 22 years to combat inflation, consumer spending has helped sustain economic growth.

This month, U.S. stocks have enjoyed a winning streak as Treasury market yields declined. However, there is a possibility that the S&P 500 index will break its longest stretch of daily gains seen in two years. As of last check, the Dow Jones Industrial Average (DJIA) was trading 0.2% lower, while the S&P 500 (SPX) and Nasdaq Composite (COMP) each experienced minor declines of less than 0.1%, according to FactSet data.