Understanding Consumer Debt: Why Some People Struggle While the Economy Looks Strong

Consumer spending makes up about 70% of all economic activity, which is why it's so important to track how everyday people are managing their money. Recently, we've seen conflicting signals about consumer financial health. Some reports show rising debt problems, while others indicate strong finances and wealth. What's going on?

The answer is what experts call a "two-speed economy" - different groups of consumers are experiencing very different financial situations. Understanding this split helps explain why markets remain strong despite some concerning headlines about debt.

More people are falling behind on payments

When people can't make payments on time, it's called a "delinquency." Late payments on credit cards and car loans have been increasing recently, as shown in the chart. Banks track how late these payments are - 30 days, 60 days, or 90+ days. The rise in very late payments (90+ days) suggests some consumers are facing ongoing money problems.

Car loan delinquencies are particularly important to watch because most people try to keep their car payments current even when struggling financially. After all, most people need their cars to get to work.

Payment problems affect some groups more than others

The rise in late payments isn't affecting everyone equally. It's mostly happening among "subprime" borrowers - people with lower credit scores who typically pay higher interest rates. As the chart shows, there's a huge gap between late payments for subprime versus "prime" (higher credit score) borrowers.

This explains why major banks aren't too worried about overall consumer health. Their typical customers - who tend to have better credit - are still doing fine despite inflation concerns and other economic worries.

Most households can still manage their debt

To really understand if debt is a problem, we need to compare it to income. Currently, Americans spend about 5.5% of their income on debt payments. While this figure is rising, it's still lower than historical averages, suggesting most people can handle their monthly bills.

Americans are saving about 4.6% of their paychecks - below the historical average of 6.2%, but still positive. And overall household wealth remains near record levels. These factors help explain why consumer spending has remained strong despite economic uncertainties.

The bottom line? While some consumers are struggling with debt, most households are in decent financial shape. This "two-speed economy" helps explain why markets remain resilient even as certain economic indicators raise concerns.

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