While economic activity continues to surprise to the upside and confound those calling for one of the most anticipated recessions in history, credit conditions for many Americans appear to be deteriorating given the weight of elevated inflation, higher interest rates and depleted savings previously supercharged by pandemic-era stimulus. Add in the resumption of federal student loan payments for nearly 27 million borrowers in October, and the credit outlook, particularly for those with lower income, is likely to deteriorate further as we get closer to 2024. Indeed, a recent survey by Bloomberg Economics revealed that the average household in the bottom 40% of income earners has roughly $1,200 less liquid assets versus pre-pandemic levels when adjusting for inflation. Taken together with higher financing rates, this liquidity drain has started to bleed through in auto loan delinquencies, particularly for Subprime borrowers, where 2023 year-to-date high in 60 day+ late payments in May set a new, all-time record, surpassing the previous high-water mark of 5.96% in October 1996 according to Fitch Ratings. Perhaps more troubling, this credit deterioration has also afflicted prime auto loans, where delinquencies edged up to the highest level in 12 years during May, according to S&P Global Ratings.
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