No Surprise Department 

In the no-surprise department, the New York Fed says Younger Borrowers Are Struggling with Credit Card and Auto Loan Payments

Total debt balances grew by $394 billion in the fourth quarter of 2022, the largest nominal quarterly increase in twenty years, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed’s Center for Microeconomic Data. Mortgage balances, the largest form of household debt, drove the increase with a gain of $254 billion, while credit card balances saw a $61 billion increase—the largest observed in the history of our data, which goes back to 1999. All told, the increase in credit card balances between December of 2021 and December of 2022 was $130 billion, also the largest annual growth in balances. Delinquency transitions in the fourth quarter ticked up as well, for credit cards, auto loans, and mortgages. These are increases in delinquency transition rates that appear relatively small, perhaps a return to pre-pandemic norms, but our closer look here reveals some worsening of delinquency rates among certain groups. In this analysis as well as in the Quarterly Report we use our Consumer Credit Panel (CCP), which is based on anonymized credit reports from Equifax.

 Younger Borrowers Are Missing Auto Loan Payments

Although the overall share of debt that is delinquent remains below pre-pandemic levels, the relatively high transition rates into delinquency suggest a rapid return to pre-pandemic delinquency rates for credit card and auto loan borrowers.

Contributing Factors

One contributing factor may be rising interest rates. As interest rates rise, so does the cost of borrowing, and higher interest rates result in higher minimum monthly payments for credit card balances. On the other hand, most auto loans are fixed rate loans, so only auto loans taken out more recently faced these higher rates. This difference between credit card debt (variable rates) and auto loans (fixed rate) is consistent with the pattern of delinquencies rising faster for credit cards than for auto loans and may be evidence of higher interest rates driving some of the increase in delinquency.

Another potential factor is inflation, since the pace of inflation sped up sharply through 2021 and 2022, reaching a fourty-year high last summer. A big factor underlying the initial increase in inflation rates was car prices, and this is directly exhibited in our data—at the end of 2019, the average new auto loan was for about $17,000, but that amount grew rapidly through the pandemic, peaking at nearly $24,000 in the fourth quarter of 2022. Americans have been facing higher prices everywhere though—including on purchases they may be putting on their credit cards—at the grocery store, at the gas pump, and for many other types of goods. It is possible that increasing prices—and correspondingly, debt service payments—are cutting into borrowers’ balance sheets and making it more difficult for them to make ends meet, particularly as real disposable income fell in 2022.

Surpassing the pre-pandemic delinquency rates isn’t worrisome per se, because the pandemic recession ended what had been a historically long economic expansion. But the fact that more borrowers are missing their payments, particularly when economic conditions appear strong overall, is somewhat of a puzzle. This is particularly concerning for younger borrowers who are disproportionately likely to hold federal student loans that are still in administrative forbearance. Some of these borrowers are struggling to pay their credit card and auto loans even though payments on their student loans are not currently required. Once payments on those loans resume later this year under current plans, millions of younger borrowers will add another monthly payment to their debt obligations, potentially driving these delinquency rates even higher.

Puzzled?

The New York Fed says rising delinquencies are "somewhat of a puzzle". 

Why economists are puzzled is a serious mystery.

The price of rent and food have soared. Those are monthly non-discretionary items that are impossible to avoid. 

People can cut back on discretionary spending, but anyone who stretched to buy a home or car, or to rent an apartment is in trouble.

Nonetheless, if you believe the data is real and not another seasonal-adjustment anomaly, Consumers Go on Huge Retail Sales Shopping Spree in January After Months of Weakness

CPI Accelerates 0.5 Percent in January, Up 6.4 Percent From a Year Ago

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CPI Data from BLS, chart by Mish

On February 14, I noted CPI Accelerates 0.5 Percent in January, Up 6.4 Percent From a Year Ago

The Consumer Price Index rose 0.5 percent in January and that is on top of an upward revision in December from -0.1 percent to +0.1 percent.

Overall prices have gone up 6.4 percent but wages haven't. Worse yet, nondiscretionary items like food and shelter have risen even more.

Food is up 9.9 percent from a year ago. Shelter is up 7.9 percent. 

CPI Month-Over-Month Shelter 

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The cost of shelter has generally risen more than the rate of overall inflation for about a year.  

The Fed may be "somewhat puzzled", but I am not. 

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