Americans Struggle with 30% Drop in Consumer Confidence, Rising Debt

High inflation and elevated interest rates have made it increasingly difficult for many Americans to make financial progress in recent years. The economic strain is exacerbated by a series of policy measures implemented by the Trump administration, including significant tariffs that have driven up prices and created uncertainty. This has pushed consumer confidence to historic lows, with a combination of rising prices, uncertainty, and pessimism potentially leading to a complete negative impact. Consumers and businesses reducing their spending could have a chain reaction on the labor market and the overall economy.

Despite the resilience shown by consumers who have supported the U.S. economy, they are increasingly feeling the pinch. Debt burdens and default rates are on the rise, with indicators such as the increasing use of installment payments for grocery purchases flashing red. Those most affected include student loan borrowers, who have been left in confusion by the opposing stances of the two administrations on unpaid loans since the pandemic. The hope for significant reductions in monthly payments, especially debt forgiveness, has been dashed. Instead, those in default face not only a significant drop in their credit scores but also the risk of having their wages garnished by the government.

Post-pandemic debt and savings fluctuations have been significant. The pandemic disrupted the U.S. economy, but it also allowed some Americans to quickly pay off debts and accumulate savings. Stimulus checks, payment suspensions (including student loans and rent in some cases), reduced travel and other non-essential spending, and a 430 billion dollar refinancing boom helped Americans build up significant funds and reduce their debt burdens. These savings reserves drove the post-pandemic economic recovery, and credit card balances surged accordingly. Record-high balances themselves are not necessarily a troubling sign, as population growth, more people turning to online shopping, and a strong economy and wages naturally increase credit card usage. However, the post-pandemic recovery has been accompanied by once-in-a-decade high inflation, which the Federal Reserve is trying to combat with equally record-high interest rates. The key question is how people will cope with increasing and costly debt.

By the end of last year, Americans were finding it increasingly difficult to manage rising debt, with some indicators reaching the most severe levels of over-indebtedness since the Great Recession. The proportion of households seriously delinquent on auto loans and credit cards hit a 14-year high. Additionally, at the start of this year, there were widespread expectations that student loan delinquencies would worsen. The 3.5-year payment suspension ended in September 2023, but an additional clause provided a one-year "buffer period" during which borrowers were protected from the negative impacts of delinquent payments. This grace period ended on September 30, 2024, and delinquent payment records began to be included in credit reports. The New York Federal Reserve's first-quarter household debt and credit report showed that after the policy of suspending delinquent loans from being reported to credit bureaus during the pandemic ended, the student loan delinquency rate jumped from 1% to 7.74%.

The use of "buy now, pay later" installment plans has become increasingly common, with consumers of all ages, especially the young, incorporating them into their shopping habits. Ideally, these loans can serve as an alternative to credit cards for those seeking more flexible payment options, trying to escape financial difficulties, or hoping to spread out large transactions to better match their budgets. However, the most concerning scenario is when these loans are used to purchase essential items like groceries. In recent months, the types of goods purchased with these loans have raised alarms among economists and analysts. A survey conducted in April and May showed that a quarter of "buy now, pay later" users said they would use installment payments to buy groceries, up from 14% a year ago. This behavior surged in 2022 when inflation hit a 40-year high. This indicates that people are stretching their budgets to the limit in the face of higher interest rates, rising prices in grocery stores and other sectors, student loan repayments, and other economic headwinds.

Consumer confidence, closely monitored by the University of Michigan, has been plummeting in recent months and remains near historic lows as of May. Since the university began tracking Americans' views on the economy in 1952, the U.S. has experienced nearly ten recessions, several oil price shocks, a few wars, several rounds of inflation, a major financial crisis, and a global pandemic. However, the impact of a large-scale trade war has almost surpassed all these events. Trump's comprehensive and significant tariffs and other policy shifts have fueled concerns about an economic recession and caused the confidence index to decline each month this year. The university's consumer confidence index has fallen nearly 30% since January. The biggest concern for the economy is how individuals and businesses will respond to this pessimism and to what extent they will change their behavior. Reduced consumption and business investment could ultimately lead to economic contraction and rising unemployment.