Although the labor market is getting better, consumer delinquencies are rising steadily.

In September the unemployment rate fell to 4.2%, which is the lowest it has been since February 2001, but somehow consumer loan defaults are still rising.

Actually, the discrepancy between consumer credit performance and the labor market is at record levels. Why is this the case?

Stephen Caprio and Matthew Mish are a couple of USB analysts that went in search of answers to that question, and what they discovered showcases why a number of Millennials are having a difficult time.

Caprio and Mish stated there are two segments that are lagging behind because of the labor market; Millennials and households with lower incomes.

They mentioned that the two-speed turnaround in US consumer finances is the most underappreciated variable conveying customer stress.
The two analysts calculated a number of metrics from the most recent Fed Survey of Consumer Finances, which included the debt levels to asset ratios as well as the income across various age ranges. The ratios are close to record levels and it shows the debt-to-income ratios for Millennials is comparable to levels in 2007.

The Millennials debt-to-assets ratio is rising fast

There is probably more to the story. As per a Fed survey, 38% of Millennials with student loans are not making their monthly payments and there is also a structural shift from home ownership and taking out a mortgage to renting. As a result, there is an increase in households paying rent and paying for leasing vehicles. In essence, they probably have major expenditures that aren’t being picked up by the debt numbers.

UBS stated that there is a problem when evaluating the financial obligation ratios of consumers with lower income and Millennials.

What exactly is the meaning of all of this? As per UBS:

In the long run , the two-tier turnaround in consumer financial situations indicates important sections of the US population (Millennial, lower-income households) seem to be more financially susceptible than aggregate consumer credit metrics suggest As a result, these segments are usually more susceptible to variations in the conditions of the labor market and rates of interest ceteris paribus.

This is a bit concerning, particularly with the increase in interest rates.

To put this into perspective, as per UBS, Millennials have 18% of financial debt unpaid, which account for 19% of the yearly expenditures of consumers. When you combine the two “left behind” cohorts, the Millennials and lower-income households, they account for 15% to 20% of debt and expenditures of 27% to 33%.
Therefore if this group is struggling financially, there is the potential to have a significantly negative impact on the economy.

Millennials comprise a large portion of the consumers citing a default on a loan over the following 12 months.


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