Insights on Consumer Credit Risk and the K-Shaped Recovery

 

In the latest episode of the Market Pulse podcast, the Equifax Risk Advisors team delves into the current economic landscape and how it’s impacting consumers. Joined by Jesse Hardin, Tom O'Neill, Dave Sojka, and Maria Urtubey, our discussion covered a range of critical topics from the K-shaped recovery and inflation's impact on consumer behavior to rising delinquency rates and consumer spending trends. 

Here are some key takeaways from our conversation.

The K-Shaped Recovery: Winners and Losers

One of the central themes discussed was the K-shaped recovery, a term used to describe the divergent economic recovery paths of different income groups. Tom O'Neill highlighted the disparities within this recovery model: 

"If you're in the top third of the income distribution, you're in as good a financial shape as you've ever been. Wealth has risen, no debt, and wages are increasing. However, the bottom third is struggling significantly, facing affordability issues and financial stress," he said.

This dichotomy underscores the varying experiences of economic recovery, where higher-income individuals benefit from rising asset values and low-interest debts, while lower-income groups grapple with increasing living costs and insufficient income growth.

Inflation's Pervasive Impact

Maria Urtubey provided a critical analysis of inflation and its impact on different consumer groups. Despite recent drops in inflation rates, she noted the ongoing struggle for many households.

"It really comes down to a disconnect between the concept of falling inflation—which means prices are still going up, but at a slower rate—and the level of prices. Essentials like eggs and gas remain significantly higher than a few years ago, straining household budgets," she said.

This disconnect is particularly challenging for lower-income families, who spend a larger portion of their income on necessities that have seen the steepest price hikes.

Rising Delinquency Rates: A Cause for Concern

The discussion also touched on rising delinquency rates in consumer credit, with Dave Sojka emphasizing the mixed signals from different credit products.

"Bank card, private label, and auto delinquencies have surpassed 2011 levels, but first mortgage and personal loan delinquencies remain below previous peaks. The 2022 and 2023 vintages are performing worse than earlier ones due to a loosening of credit standards and some score inflation," he said.

Tom O'Neill added that while there has been some improvement in recent months, the delinquency rates for subprime borrowers remain a significant concern. The panel stressed the importance of closely monitoring these trends to anticipate potential risks.

Consumer Spending Trends

Jesse Hardin brought attention to recent data on consumer spending, which remains a crucial driver of economic activity. He noted a shift in consumer behavior towards more selective spending.

"Consumers are becoming more choosy about where and how they spend their money. Many have decided to cut back in certain segments or find alternatives to mitigate costs. For example, while vehicle prices have dropped, the cost of financing remains high, leading consumers to hold onto their cars longer," he said.

Hardin's analysis underscores the resilience of consumer spending despite economic challenges. He highlighted the importance of understanding these behavioral shifts to better predict future economic trends.

Preparing for Future Economic Conditions

As the panelists looked ahead, they discussed potential interest rate reductions and their implications for the economy. Maria Urtubey expressed cautious optimism.

"While it's encouraging to hear that the Federal Reserve might be more flexible with its 2% inflation target, the key will be how quickly these rate reductions are passed on to consumers, particularly in terms of credit card and personal loan rates."

Tom O'Neill emphasized the importance of contextualizing economic data to gain a clearer picture of the broader economic health.

"It's essential to look at various factors, including income growth relative to inflation, wealth distribution, and credit trends, to understand the true state of the economy. This holistic approach can help us provide more accurate recommendations and support for our clients," O’Neill said.

Conclusion

The latest Market Pulse podcast episode provides valuable insights into the current economic climate, highlighting both challenges and opportunities. From the complexities of the K-shaped recovery to the nuanced impacts of inflation and delinquency rates, the panelists offer a comprehensive analysis of the factors shaping today's economy. As the  team continues to monitor these trends, their expert commentary and recommendations will be crucial for navigating economic uncertainty and uncovering growth opportunities in consumer credit risk.

For more detailed insights and future episodes, listeners are encouraged to reach out to the Equifax Risk Advisors team at riskadvisors@equifax.com. And for more insights, check out other Market Pulse podcast episodes and webinars. 

*The opinions, estimates, and forecasts presented herein are for general information use only. This material is based upon information that we consider to be reliable, but we do not represent that it is accurate or complete. No person should consider distribution of this material as making any representation or warranty with respect to such material and should not rely upon it as such. Equifax does not assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice. The opinions, estimates, forecasts, and other views published herein represent the views of the presenters as of the date indicated and do not necessarily represent the views of Equifax or its management.