KC Fed, Report: When the Music Stops, Slowing Wage Growth May Lead to More Delinquent Debt

“Despite significant disruptions to the economy during the pandemic, household balance sheets remained surprisingly strong. Substantial government transfers and altered spending patterns led to excess savings peaking at $2.3 trillion in the third quarter of 2021 (Aladangady and others 2022). Although excess savings have since declined, updated estimates show that excess savings remained around $1.1 trillion through the end of 2022.”

“These excess savings could allow consumers to repay debt; however, average consumer debt has actually increased.”

“Subprime auto debt has risen nearly 10 percent above pre-pandemic levels, and delinquency rates have increased despite high wage growth in the economy. Historically, high wage growth has been associated with lower transitions into delinquency. Should wage growth slow, delinquency rates would likely rise even higher, especially among subprime borrowers.”