2025 Consumer Financial Struggles Signal Potential Stock Market Risks at $13.9T Debt Level
Rising consumer debt and payment difficulties threaten U.S. economic growth as spending, which makes up 70% of GDP, shows signs of slowing.
Recent data reveal that a significant portion of U.S. consumers are facing financial challenges, raising concerns about the sustainability of the economic expansion. According to a UBS quarterly survey, many Americans are struggling to cover their expenses, which could stall consumer spending—the driving force behind approximately 70% of the U.S. GDP, as reported by Bloomberg.
In response to escalating household debt, JPMorgan’s consumer finance expert Richard Shane has downgraded price targets across all stocks under his coverage. Shane’s latest report, cited by Barron's, highlights a cautious outlook for 2024, emphasizing risks from a slowing economy, labor market weaknesses, and increased political uncertainty. Stocks such as American Express Co. (AXP), Capital One Financial Corp. (COF), and Ally Financial Inc. (ALLY) are flagged as particularly vulnerable.
Investor Implications
The UBS survey, which included 2,100 U.S. participants, found that 44% of respondents spend at or beyond their income levels. Additionally, 40% experienced credit issues in the past year, including difficulties obtaining credit cards or loan defaults—a rise from 37% the previous year. Only 17% reported improved financial conditions over six months, down from 20% a year ago.
While 75% feel confident about securing a home mortgage, this is the lowest since 2014, reflecting tighter lending standards. Alarmingly, 21% admitted to falsifying information on loan applications, up from 19% last year. Delinquencies on credit cards and student loans overdue by 90 days or more have increased, although auto loan delinquencies remain high but stable.
The UBS report points out that lower-income consumers are disproportionately affected, with unsecured loan markets showing rising delinquencies and tighter credit conditions. This trend is expected to push corporate bond yields higher throughout 2024, with risk premiums over U.S. Treasury debt increasing for both investment-grade and high-yield bonds.
Household debt in the U.S. reached $13.9 trillion in the second quarter of 2024, marking 20 consecutive quarters of growth. This equates to over $42,000 per capita, including $1.3 trillion in auto loans, $0.8 trillion in credit card balances, and $1.5 trillion in student loans.
Looking Forward
Despite record-high consumer debt in absolute terms, relative to household wealth, the levels remain manageable. Delinquency rates for mortgages, credit cards, and auto loans are stable and significantly lower than during the 2008 financial crisis. Unemployment remains low at 3.5%, supporting ongoing consumer spending. Furthermore, fewer survey respondents express concerns about job loss compared to previous years.
UBS’s recession risk indicators are currently much lower than those seen before the 2001 and 2007 recessions, and Shane does not anticipate a U.S. economic downturn in the near future.
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