When it comes to the U.S. economy, in recent decades an idiom has emerged: consumer spending is the backbone of the economy.
These days, on average, personal spending at the household level makes up around two-thirds of America’s economic output each year – and one of the ways people are able to spend so much is through debt.
People take on debt for things like businesses, car loans and mortgages and, of course, for everyday shopping – using credit cards and short-term loans. In the short term, this helps grow the economy and, so long as people pay their loans back on time, there aren’t many issues.
But as recent reporting from the Wall Street Journal notes, banks are seeing an increase in late payments and charge-offs, which is when loans are written off as a loss.
Telis Demos is a writer with The Wall Street Journal’s financial analysis column Heard on the Street and Take on the Week, a weekly podcast about markets and finance. He joined Texas Standard with the story. Listen to the interview above or read the transcript below.
This transcript has been edited lightly for clarity:
Texas Standard: You report that over the past few years, banks have seen an uptick in late payments and they’re also writing off more loans as losses. Why the increase like this?
Telis Demos: What we’re seeing in the data right now – and keep in mind, this is kind of a reflection of not where things are at this very moment, but where they’ve kind of been over the last couple of years – is that back in 2021 and 2022, you had a lot of people walking around with a lot more money in their pocket than they normally had. That was because during the pandemic, the government sent out stimulus checks to people.
People were locked down and so credit card companies saw all of this and said, “hey, we can actually lend these people more money. We can give them a bigger car loan.” And by the way, used car prices had soared. So you know what? You know, God forbid they default, the value of that used car, it’s great collateral.
Those things, though, didn’t last that long, right? People’s budgets eventually came back into balance, which meant that people didn’t have that extra money laying around anymore. Used car prices started to come down.
So, a lot of those loans from ’21 and ’22 started to go bad. People were late with the payments, people were missing payments, and eventually some of those were written off. That created this kind of bump in the data that showed that consumers were not keeping up with their debts.
That’s kind of where we are right now.
Let me interject because I’m having a little trouble understanding how much of a lag we’re talking about here. We saw the bump in the debt data. Right now, where do we stand, historically speaking, when it comes to debt?
Right now, the average household is carrying just over $10,000 in credit card debt. That’s the average household across the economy. That number is actually the highest it’s been since 2009. This is according to Wallet Hub’s analysis of Federal Reserve data.
What happened during the pandemic is that people actually started borrowing less on a per-household basis. People kind of delevered, as they say in financial markets. People have been relevering over the last couple of years. That’s on a household level.
Sometimes people talk about the national data. I’m talking about how much an individual household might have. As long as people are making more money, they can handle more debt.
But it just means…
Yeah, right. There’s the rub. That just means that people now have that much more debt that they’ve got to keep up with. And by the way, the cost of credit card debt has gone up tremendously because interest rates have gone up.
So right now, the average credit card interest rates are in the 20 percents. They are at the highest level they’ve ever been.
Let me stop you there. How worried are lenders and banks right now about large-scale defaults? Do they think that this is going to continue?
I don’t think that they’re that worried right now, just because of where things have been trending, which is that, like I said, we had that kind of trouble from ’21 and ’22.
But things kind of leveled out after that, right? Banks kind of tightened up their underwriting. They were sending out fewer credit cards to anybody who would ask. And so those numbers have actually been trending downwards.
So they actually expect charge-offs of credit card and auto loans to decline a little bit later this year. That’s according to Moody’s ratings, one of the big ratings agencies. But now we’re getting into a new phase, which is, okay, people have this debt, maybe they’re managing it, but what are the next stresses going to be?
Well, I can think of one right away. What about tariffs, right? I think a lot of folks are predicting we’re going to see consumer prices rise.
Absolutely. So that’s where we look at the situation. People have a lot of debt. It’s expensive. They’ve just kind of come back into kind of a more sort of normal zone for paying them back.
But now they’re going to be hit with this entirely new whammy, which is frankly one that’s a lot scarier in a lot of ways than it was in that post-pandemic period. And that’s because people were working. It was hard to hire people, back during that time. A lot of people were working.
The unemployment rate after, of course, the initial part of the pandemic, the unemployment rate went down. If people aren’t working, either because tariffs are putting some companies out of business for one reason or another, or maybe because they’ve been laid off from their government job, right? Whatever you think of government employees, they have credit cards, right? They shop.
And so if those people aren’t working, maybe they’re not able to pay their credit card. Employment is really the critical variable when it comes to consumer debt. As long as people are working, they’re generally paying back their loans.
Do you see a calamity in the future? I mean, what’s that light at the end of the tunnel?
I mean, will tariffs continue as they’ve been laid out thus far? We’ve obviously seen a lot of ups and downs. Where are they going to land? How far will job cuts for governments go?
Certainly, we’re seeing a lot of worrisome, I would say the category is “sentiment indicators,” right? Consumers are worried. Companies are, by all reports, holding off on investment decisions, on hiring decisions.
Whether that worry turns into real problems is where we are right now. Right now, the stock market seems to be increasingly talking itself into that it is going to be a problem, but I don’t want to call calamity yet because we simply don’t know what the inputs into the model are yet. We don’t know what taxes are going to be, right? We still have the budget process this year.
Things are certainly in, I would say, a more worrisome and uncertain place than they’ve been at any time over the last few years.
