An increasing number of consumers are facing credit and financial stressors. What economic factors are causing this?

In the September 28 episode of Market Pulse podcast, a panel including myself and my colleagues, David Sojka, Jesse Hardin, and Tom Aliff of the Risk Advisory Group at Equifax delved into the factors causing consumer stress, its impact, and how data analysis can help distinguish different consumer segments. 

Consumer Stress: A Growing Concern

For the past couple of years, consumer spending has been consistently healthy after that initial shock in the early part of 2020. But now more retail reports are coming out illustrating a shift in consumer spending, focusing more on essentials than away from luxury items.

Economic data is showing that the savings built up during the pandemic period have largely eroded, and that personal expenditures have been outpacing disposable income for the past year and a half. And then when we look at credit trend data, we see that it's showing an increase in revolving credit usage and payment delinquencies. On top of that, you see inflation that's created a need to tighten belts and for an increasingly large number of consumers has necessitated the use of credit to cover basic monthly expenses after savings and other assets have been exhausted.

There are additional economic factors that have surfaced to add further stress: the resumption of student loan payments for millions of consumers and noteworthy labor strikes.

The K-Shaped Economy

The concept of a K-shaped economy suggests that different consumer segments are impacted differently by economic factors. Tom Aliff explained that the current economic situation is nuanced. While some consumers are doing well, others face significant challenges. High-income individuals with access to credit and stable mortgages fare better, while subprime consumers experience rising delinquencies.

“When we started talking about this and referencing a K-shaped economy, a lot of it is, of course, out of an ability to describe it and to understand where pivots and shifts are occurring. And one of the key separations that we found at the time was that the subprime market, those consumers that were having a credit score less than 620, had dropped from 26% down to 19,” Aliff said. “And when we continue to talk about this in that nuance, instead of thinking about us evolving away from, we're evolving with what we're calling that K-shape.”

Data-Driven Insights

The panel emphasized the role of data in understanding consumer stress. Equifax can analyze data at a granular level to identify trends and variations in different consumer segments. This allows for a better understanding of where stress is prevalent and how it affects consumers.

Identifying Diverse Impacts

It is important to distinguish between different impacts on consumers. Factors like mortgages, student loans, access to credit, and specialty finance play a role in how consumers experience financial stress. By examining these variables, lenders can develop targeted strategies to assist those in need.

Looking Ahead

Jesse Hardin shared insights into how to assess the potential impact of macroeconomic events on consumers. He advised looking at the likelihood of an event occurring and its potential impact on your customer base. Some events, such as rising gas prices, have a high likelihood and significant impact, making them crucial to monitor. Others may be interesting, but not directly relevant to your portfolio.

Stay Tuned for More Episodes on Consumer Stress

This episode is part of a podcast series on consumer stress. Look for upcoming episodes on what lenders can do  to address the various impacts, how these impacts are different for different consumers, and what kind of information we can use to distinguish those consumers who are thriving from those who may be struggling financially. 

* 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.