Have You Priced in the Struggling Consumer?

Most American consumers are increasingly struggling. That is not as obvious as it should be, as the top end of the population continues to do well. And the upper 10% of the population drives just over 45% of all consumer spending. You can see this from the quarterly results from Delta Airlines DAL on Thursday. The better-than-expected numbers were driven by top-end travelers. High-margin revenue streams contributed 59% of total revenue during the quarter. Premium revenue also continued to outpace that of the main cabin. Renumeration from the high-end consumer base of American Express AXP via their co-loyalty program was up 10% to $2 billion.

It is important to note that most consumers lost buying power against inflation for most of the previous administration with the consumer price index hitting 9.1% in June 2022. Inflation levels have moved down sharply after cresting in the summer of 2022, but all the savings from the pandemic largess are now long gone and the unemployment rate has moved up from its cycle low of 3.4%. It is now above 4%.

In addition, a couple of significant programs that were instituted during the Covid pandemic are now coming to an end. The first is the suspension of student loan payments that had been in place for roughly five years. Payments have resumed as well as collections on delinquent loans. Despite years of taxpayer-financed largess, the suspension doesn’t seem to have improved the financial prospects of loan holders based on delinquency rates. In the first quarter, the share of student loan debt that is seriously delinquent, or more than 90-days past due, soared to 7.7% from just a half of 1% in the fourth quarter of 2024.

Delinquencies will be going higher from here. The overall student loan balance in the United States is roughly $1.8 trillion. Obviously, payments now going back to service this debt take away from consumer spending elsewhere from the over 40 million student loan holders. Or at least the ones that didn’t take advantage of the student loan deferrals to shore up their finances. In addition, the reinstatement of student loan payments has significantly lowered credit scores. This makes getting consumer credit more challenging for millions, including for home mortgages and auto loans.

And speaking of home mortgages, Federal Housing Authority loan holders were also provided a large amount of taxpayer funded largess due to the pandemic. This involved loss mitigation efforts around their mortgages. This kept the homeowner out of possible default, and many times, the same homeowner was granted a reworked mortgage on multiple occasions.

A good portion of this program will end on Oct. 1. The delinquency rate on FHA loans closed 2024 at just over 11%. The delinquency rate on VA loans was 4.7%. To put this in perspective, at the end of last year the delinquency rate on conventional mortgages was just over 2.6%. I expect FHA loans to follow the trajectory of student loans when repayments were restarted, and delinquency rates will see a huge surge to close out 2025. Given the low-down payments required for FHA mortgages, I expect many homeowners to just abandon their abodes. This is obviously not what the already struggling housing market needs right now.

Ending on a brighter note, the top-tier consumer should continue to stay above the fray provided housing prices don’t take a notable tick down and/or the stock market doesn’t reverse its recent gains. The longer-term impact of AI on the white-collar workforce is also something to monitor.

In summary, most consumers are in an increasingly difficult position and that is unlikely to get better over the near term. One reason, U.S. gross domestic product growth is projected to come in at less than 1.5% this year -- a scenario that I don’t believe is priced into the market.

At the time of publication, Jensen had no position in any security mentioned.