The US economy is caving in, but overdue debts are dropping

Current account.
Current account.
Image: Reuters/Mark Makela
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Americans are steeling themselves for the biggest economic hit since the Great Depression. But even as unemployment skyrockets, overdue consumer debt is, for the moment at least, in decline.

The economy went into freefall this year, because of restrictions aimed at containing the coronavirus pandemic. Even so, the percentage of borrowers who were past due on auto loans, credit cards, personal loans, and mortgages fell last month compared with March, according to TransUnion data. Delinquencies for mortgages and personal loans were also lower in April than a year ago.

The divergence between a crumbling economy and overdue debts probably comes down to forbearance from lenders, according to Matt Komos, vice president of research and consulting at TransUnion. Financial companies were in pretty good shape going into this recession, and they’re fortified with enough capital to absorb losses for a while. Consumers have also gotten respite from the $2 trillion Cares Act, which includes a $1,200 check for Americans and beefed up unemployment benefits.

The loan forbearance is providing a temporary shock absorber for consumers. Leniency on mortgages, for example, might give borrowers some extra short-term cashflow, which in turn helps them stay on top of other debts like credit cards and auto loans, Komos says.

That said, financial stress is unquestionably on the rise. Financial hardship—defined as deferred payments, frozen accounts, and frozen past-due payments—is increasing rapidly.

The data show that a severe financial implosion has been delayed but not eliminated. Massive government aid programs and leniency from financial institutions have helped keep consumers afloat, for now. But everything depends on how quickly officials are able to restart the economy, whether emergency support for workers and business lasts long enough, and whether banks and financial institutions can afford to continue freezing accounts and deferring payments on debt.

“It’s temporary shock absorption,” Komos said. “The question becomes, how long and to what extent will it last?”