Although the US economy has performed well in the past year against a backdrop of high inflation and high interest rates, many American borrowers have not felt the sweetness of good times...

Forecasts that the US economy will fall into a recession have mostly disappeared this year; at the official data level, US employers are seemingly healthy in adding jobs every month; American families are also continuing to spend money-because many people have locked in ultra-low mortgage rates before the Federal Reserve began its aggressive rate hikes to curb inflation in 2022.

However, for those Americans who need to borrow, their situation is becoming more and more precarious.

Note: The deep red line is the total interest expense of unsecured consumer loans, and the light red is the mortgage debt

After nearly ten interest rate hikes by the Federal Reserve in the past two years, the cost of homebuying, car buying, or credit card borrowing has reached the highest level in decades for Americans. According to data from the US Department of Commerce's Bureau of Economic Analysis, the total mortgage interest paid by US consumers in 2023 increased by 14% from the previous year. The interest on other types of consumer debt, such as credit cards and auto loans, has skyrocketed by 50%.

This situation has not improved at all since this year. The Federal Reserve only expects to cut interest rates once this year in its June interest rate meeting dot plot, although the expectation for a rate cut has risen this month after slowing inflation and employment data in recent weeks, the benchmark interest rate may still remain near 5% before the end of the year.

In fact, many American households have already spent a lot of cash they saved during the pandemic stimulus stage. Although inflation has eased significantly over the past year, faster price increases than usual in recent years have objectively greatly increased the burden on American consumers.

Data from Moody's Analytics shows that more than three-quarters of Americans' excess savings are concentrated in the top 10% of households-income households with an annual income of $245,000 or more.

Note: Excess savings of people with different incomes

More and more ordinary families are relying on credit card consumption, and their credit card lending scale is increasing month by month.

Data from the New York Fed shows that credit card balances in the first quarter of 2024 have risen to $1.1 trillion, the second-highest level ever, an increase of about a third compared to 2022. According to data from TransUnion, a US consumer credit reporting agency, the average credit card debt balance for personal borrowers in the first quarter exceeded $6,000, an increase of nearly a quarter from two years ago.

What is more worrying is that such growth has occurred when credit card interest rates are repeatedly hitting new highs. According to data from the Federal Reserve, the average annual interest rate for credit card repayments this year has reached around 22%, the highest value since 1996. In contrast, the average credit card interest rate two years ago was only about 15%.

Borrowers with lower credit scores or higher rates for store credit cards often have higher interest rates than average. Therefore, for these borrowers, higher interest rates will quickly accumulate a 'snowball'-like debt. According to Bankrate's data, at a typical annual interest rate of 29%, calculated based on an average loan balance of about $6,200 per credit card, the minimum monthly payment will exceed $200. It is about $175 at 22% interest rate, and about $140 at 15% interest rate.

Note: Interest and principal in different annual interest rates

This has caused more and more borrowers to fail to repay on time, especially those who have a lot of debt. Federal Reserve data shows that the delinquency rate of credit card accounts in the first quarter exceeded 3%, the highest level since 2011. According to data from the New York Fed, about one-third of credit card balances are overdue among borrowers who have almost or completely maxed out their credit cards.

Note: Different usage ratios of credit card limits and different delinquency rates, with the topmost representing the delinquency rate of credit cards that are basically maxed out.

For many Americans who did not buy a house before the mortgage interest rate doubled in 2022, owning their own home has now become an increasingly difficult dream. Potential sellers (that is, those who already own real estate and consider selling) are unwilling to give up their existing low-interest mortgages, so they choose not to sell their properties, which has reduced the inventory of properties for sale in the market and kept house prices high. At the same time, the proportion of tenants who default on debts is much higher than that of those who own houses.

Note: The proportion of own-home and tenant who default on payment, gray is tenants, and red is own-home

More and more Americans are beginning to use 'buy now, pay later' services for consumption. 'Buy now, pay later' is a fintech loan product that has become popular in recent years and usually doesn't appear on credit reports. According to Bankrate's data, more than one-third of Americans have used at least one 'buy now, pay later' service when checking out.

Last autumn, with the end of the federal student loan forgiveness program, student loans began to be repaid again, and the financial situation of some student borrowers was worse than two years ago. Data from the US Department of Education shows that about 40% of student loan borrowers missed their first scheduled repayment date.

In addition, since the historic rise in car prices caused by the epidemic, more and more borrowers have been unable to repay their car loans. Moody's data shows that banks' write-off of bad auto loans has recently reached its highest level since 2011.

Not only have car loan interest rates continued to rise, but other expenses for car buyers, such as vehicle insurance, maintenance and repair costs, have also skyrocketed.

Data from car research websites Edmunds and Cox Automotive show that more and more car loan borrowers owe more than their cars are worth, and the number of repossessed vehicles due to the inability to repay is also on the rise...

Note: The proportion of bad auto loans, red for banks, orange for non-bank financial institutions

All of these seem to have continued to amplify the pressure for the Federal Reserve to lower interest rates. And now, has current Federal Reserve Chairman Powell already felt the 'pain' of American borrowers?

Editor: Eason