How consumers manage their money matters a lot for the whole economy. When people spend money on goods and services, it makes up about 70% of all economic activity, which has helped our economy grow better than expected in recent years. However, some recent signs that consumers might be struggling have worried investors about a possible economic downturn.
Recent news stories talk about rising debt levels and missed payments, along with concerns about higher prices and slower growth. At the same time, other economic reports show that many households have strong finances, record-high wealth, and can handle their monthly bills. This seems confusing – so which story is correct? Are there hidden problems in the economy?
The explanation is what some experts call a “two-speed economy,” where financial situations vary widely among different groups of people based on their income, wealth, credit scores, and other factors.
While the financial struggles of many Americans shouldn’t be ignored, it’s important to understand the difference between what affects individual households and what impacts the stock market and investments. When looking at consumer financial health, we need to consider not just debt, but also savings rates, how much of people’s income goes to debt payments, and overall wealth. This bigger picture helps explain why financial markets have stayed relatively strong despite these challenges.
More people are falling behind on payments
One important sign of consumer financial stress is the delinquency rate – which simply means the percentage of people who are late on their loan payments. Over the past two years, more people have been late paying their credit card and auto loan bills, as shown in the chart above.
Lenders track how late payments are in stages – 30 days late, 60 days late, and 90+ days late. The number of new people becoming late on payments is especially important because it shows who has just started having money troubles. The increase in people who are very late (90+ days) on credit card payments suggests some consumers are facing ongoing financial problems.
Auto loan late payments are particularly telling because most people try very hard to keep paying their car loans, even when money is tight. This is because having a car is often necessary for getting to work and carrying out daily activities. During the housing crisis, many people prioritized car payments even when they owed more on their homes than the homes were worth.
Late payments vary greatly depending on credit scores
What explains the rising late payments and why do they differ between types of loans? Recent information shows these patterns are mainly driven by differences in credit quality. Credit quality refers to a person’s history of managing debt, from subprime (weaker credit history) to prime (stronger credit history). Prime borrowers usually present lower risk to lenders, while subprime loans typically have higher interest rates because there’s a greater chance they won’t be fully repaid.
Recent numbers show that the overall increase in auto loan late payments is happening mostly among borrowers with lower credit scores. As the chart shows, the difference in late payment rates between subprime and prime borrowers is large both in actual numbers and compared to historical patterns. Similar patterns can be seen in credit card late payments.
This pattern also explains why major banks haven’t expressed broader concerns about consumer financial health. During recent earnings announcements, bank leaders noted that their consumer loan portfolios remain strong. This is true despite worries about tariffs, weak consumer confidence, inflation concerns, and other economic issues.
Overall debt payments remain affordable for most
It’s normal for debt levels to grow over time as the economy expands. To properly assess consumer financial health, we need to compare debt levels to income and savings. Currently, the ratio of consumer debt payments to household income is 5.5%. While this number is moving toward its long-term average, it’s still low compared to historical standards. This suggests that the average consumer is still in a healthy position when it comes to managing their monthly bills.
Similarly, household savings rates have stabilized recently, with Americans now saving about 4.6% of their paychecks, though this is below the historical average of 6.2%. Also, the total wealth of U.S. households remains near record levels despite market and economic uncertainty in recent years. Together, these factors provide a solid foundation for the financial health of many consumers.
It’s important to recognize that these overall statistics can hide significant differences across different groups of people. The challenges faced by borrowers with lower credit scores in this “two-speed economy” are real and concerning. However, from a broader economic and market perspective, the general indicators of consumer finances remain healthy.
What does this mean if you’re an investor? While tariffs and market swings have increased concerns about inflation and recession, overall consumer trends are still strong. This is positive for investors with diversified portfolios who can handle short-term market fluctuations as markets adjust to economic and policy uncertainty.
The bottom line? The two-speed economy explains why the overall consumer picture looks strong despite some groups experiencing financial stress. For investors, it’s important to focus on longer-term trends to stay invested and reach financial goals.
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