Consumer Debt Delinquencies Rising – Consumer Behavior

The share of outstanding U.S. consumer debt that’s in delinquency rose in the fourth quarter of 2024 to the highest in almost five years, according to a Federal Reserve Bank of New York report. Consumer loan balances are increasing due to a combination of factors, including rising interest rates, inflation, and changes in consumer behavior.

When the Federal Reserve raised interest rates to combat inflation, it resulted in higher borrowing costs for consumers. This has had a direct impact on consumer loan balances, particularly for credit cards and personal loans, which often have variable interest rates. Rising loan rates have placed additional stress on consumers as loan payments have increased, with some leading to delinquencies. Outstanding balances on credit card and auto loans have seen the largest increase in delinquencies of all debt types as of the first quarter of 2025.

Elevated prices on food and everyday goods and products have enticed consumers to rely more on credit to maintain their purchasing power. This has resulted in higher credit card balances as consumers use credit to cover everyday expenses. The increased cost of living has particularly affected lower-income households, who are more likely to turn to credit cards to manage their budgets.

Typically, the goal of monetary policy is to slow the economy to bring down inflation, which in turn reduces costs.  It doesn’t work if consumers continue to pay the high prices, adding the ballooning balance to their high-interest credit cards.

Lenders have become more selective in approving loans, particularly for consumers with lower credit scores. However, the demand for credit remains high, leading to increased balances among those who can still access credit. The tightening of credit conditions has also led some consumers to seek alternative financing. (Source: Federal Reserve Bank of St. Louis)

A Brief History of Tariffs – Historical Perceptive

Before the implementation of income taxes, tariffs were the main source of revenue for the United States. Tariffs have been a source of revenue for the U.S. government since its inception over 200 years ago. Tariffs were initially implemented not just as a source of revenue, but also to reduce foreign competition and a growing trade deficit. Rapid expansion and the onset of industrialization in the late 1800s was achieved with the help of tariffs.

Congress ratified the 16th amendment in 1913 to initiate the collection of federal income taxes that same year, allowing the government to have consistent revenue from taxpayers while alleviating the need for elevated tariffs. Less than 1% of Americans had to pay income taxes in its earliest days. As income tax revenue increased over the decades, a reliance on revenue from tariffs gradually declined. Global trade also expanded with the U.S. as the country’s trade policies became less protectionist and more amenable to trade. (Sources: Office of the Historian, United States Department of State)

The Profit Cycle

The release of second quarter (April – June) earnings may be indicative as the effect of imposed tariffs in April will be discernible. Scheduled releases for most companies will occur in July and August. Retail sector activity will also be a focus to better discern the sentiment of consumers relative to the effect of tariffs. (Sources: S&P, Dow Jones, Nasdaq, Bloomberg)

Demand for corporate bonds remained intact as investors sought coverage from volatility in equities. Treasury yields swung wildly in April with simultaneous buying and selling of government bonds.  These swings in demand have been attributed to fear of combined inflation and recession, often called stagflation, anticipated by some as the result of tariff negotiations.   However, every profit cycle has a period where profits peak, then slow, and inflation lingers.  Rates are headed lower.

The bond market outperformed the S&P 500 index through the end of April, with the spread narrowing significantly thus far in May. The U.S. Aggregate Bond Index, is a broad-based benchmark that measures the performance of the U.S. investment-grade bond market, providing a comprehensive overview of the entire bond market, including government, corporate, and mortgage-backed bonds. Analysts tend to monitor the performance of bonds during periods of heightened stock volatility for indications of elongated market disruptions. (Sources: Treasury Dept, Bloomberg)

Stocks struggled in April as the uncertainty surrounding details of the tariffs rattled markets. Volatility shot higher as dramatic intra-day market swings revalued stock prices continuously with no certainty of direction. All major domestic equity indices ended April with negative year to date returns, as companies tried to assess the impact of tariffs on earnings and growth projections.

Liquidity-
What A Weaker U.S. Dollars Means 

Remarks by Fed Chair Jerome Powell agitated markets as he mentioned that markets and the Federal Reserve were caught off guard by the magnitude of the newly imposed tariffs and the broad scope affecting financial markets and trade.  There was no acknowledgement of the tariffs as a negotiating tool, whether good or bad.  Still, I am glad for the Fed taking this uncharacteristically hawkish stance, resisting Trump’s call to monetize new deficits.  We do not need more stimulus than has already been established during Powell’s tenure as Chair.  In a truly free market, there are always natural consequences to our actions.  It has been our unwillingness to experience those consequences that has brought our deficits to unsustainable levels should inflation not subside.

A weaker U.S. dollar can affect the price of imports & exports, travel abroad by Americans, geopolitical dynamics, interest rates and the status of U.S. federal debt held by foreigners. YTD equity index returns reflected the weaker dollar, with significantly higher foreign markets over the U.S.  Regardless, the status of the U.S. dollar has been and remains the dominant currency, with over 50% of global transactions conducted in dollars.