In 2025, several trends in consumer credit are expected to impact how Americans borrow and manage debt. From rising interest rates to the growth of alternative financing, understanding these trends can help consumers navigate the evolving financial landscape.

High-interest rates persist

The Federal Reserve’s policies to combat inflation suggest that interest rates will likely remain elevated into 2025, even as rate cuts are expected. High interest rates affect variable-rate loans, such as credit cards and home equity lines of credit (HELOCs). Personal loans are generally fixed-rate, but borrowers may still see rates change as lenders adjust their offerings in response to overall market conditions.

Borrowers may need to adjust by focusing on reducing high-interest debt and managing their credit wisely.

Rising credit card debt

Credit card balances in the U.S. have already surpassed $1 trillion and may grow further into 2025 as families deal with existing balances and repayments. Credit cards typically carry high interest rates, especially for consumers with lower credit scores. Rising credit card debt could contribute to long-term financial instability if not managed carefully.

It’s crucial to stay on top of credit card payments and consider consolidating high-interest debt into a lower-rate loan if possible.

Growth of Buy Now, Pay Later services

Buy Now, Pay Later (BNPL) services continue to gain popularity as a way to make purchases more affordable. However, BNPL services can lead to overspending, as they allow consumers to delay payments without fully understanding the risks involved. If payments are missed, late fees can accrue, and some BNPL providers report payment activity to credit bureaus, potentially affecting your credit score.

Use BNPL responsibly, ensuring you can meet the repayment schedule to avoid penalties and negative credit impacts.

Homeownership affordability still a challenge

High mortgage rates continue to put homeownership out of reach for many Americans. As of late 2024, the average 30-year fixed mortgage rate remains around 7%, a significant increase from previous years. Many prospective homebuyers struggle to keep up with the rising costs of buying a home and servicing debt.

Prospective homebuyers would be wise to focus on improving their credit score and saving for a larger down payment to offset higher borrowing costs.

Increased focus on financial literacy

Financial literacy continues to gain importance, especially as Americans face more complex financial products. More states are adopting financial education requirements in schools, and organizations are working to provide resources for adults. Financial literacy is important in managing credit and debt effectively, helping individuals make informed decisions that protect their financial health.

Preparing for 2025

Manage your finances as these credit trends unfold:

• Monitor your credit regularly
• Pay off high-interest debt
• Budget wisely
• Use financial tools and education

By understanding consumer credit trends for 2025 and taking proactive steps, you can stay on top of your financial health in 2025 and beyond.

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Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice.

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The financial benefits of having a good credit score are well-established and include:

• Easier access to credit.
• Better credit card offers.
• Lower interest rates.

Since employers and landlords often check the credit reports of applicants these days, your credit score can even affect where you work and where you live.

These are all tangible financial benefits. But here’s something you can’t put a price on: good credit may give you more peace of mind.

A Credit Sesame survey found a link between credit scores and how people feel about their finances. Survey respondents with good to exceptional credit scores were generally less worried about a recession, more optimistic about the economy and better able to sleep at night.

How worried are Americans about their finances?

The Credit Sesame survey asked over 1,500 adults three questions about how they felt about the economy and their own finances:

1. Are you worried about a recession?
2. How do you feel about your financial situation?
3. How often are you kept awake worrying about money?

The results showed a fair amount of concern among consumers, regardless of credit score, about the economy and their financial outlook.

• 65% are worried about a recession.
• 61% describe their financial situation as middle of the road
• 16% are pessimistic about their financial situation (vs 23.49% optimistic)
• 47% are kept awake at night at least some of the time

Overall, these figures describe a population that is cautious but not overly fearful about the financial future. However, the responses took on a different character when segmented by credit score.

Is credit score key to how people feel?

Segmenting responses by high credit scorers (670 and higher, good to exceptional credit) and lower credit scorers (669 and under, fair to poor credit) yielded a different picture.

Recession fears are widespread, and even people with good credit scores are not immune. However, they are less worried about a recession than people with lower credit scores.

From a mental health point of view, perhaps the most important indicator is how they feel about their finances when their head hits the pillow at night. Being kept awake by money worries may affect the way people function socially and professionally.

In 2023, consumers generally are concerned about the economy. The Credit Sesame survey results indicate that concern is more prevalent among people with lower credit scores.

Does a high credit score correlate with peace of mind?

Financial knowledge and personal finance management skills often go along with a high credit score. People with a higher credit score have behaved responsibly with credit and debt in the past.

But in and of itself, a high credit score does not give peace of mind. Many other factors affect how individuals feel about their finances. For example,

• Income
• Expenses
• Debit
• Savings and investments
• Job security
• Health care costs
• Family and dependents

Consumers who understand and control all these factors as part of good financial management are more likely to have a higher credit score. In other words, having a high credit score does not guarantee peace of mind. However, having responsible habits that lead to a good credit score is likely to give you more confidence around your personal finances.

Credit improvement is a gradual process involving the development of good financial habits and does not happen overnight. But a commitment to raising your score, perhaps using a credit builder tool and by following good advice can make a difference faster than you may imagine. Your new and improved credit score could indeed come with more peace of mind around your personal finances.

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Survey methodology

The Credit Sesame Credit Health and Financial Fitness Survey December 2022 was designed and executed by Credit Sesame using the WebEngage survey tool. The survey sample comprised over 1,500 Credit Sesame members with a credit score distribution resembling the U.S. general population. In aggregate the sample data is accurate with a 2.5% margin of error using a 95% confidence level.

Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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In 2022, individuals faced new financial challenges as the global economy continued to recover from the pandemic. Inflation and interest rates rose, making credit building an even more crucial tool for achieving financial stability.

Inflation and interest rates were major drivers of the global economy in 2022. Supply chain disruptions and higher commodity prices led to a rise in inflation, resulting in higher prices across many industries. As a result, it was critical for individuals to manage their credit and spending to avoid falling into debt.

Moreover, interest rates increased as a response to inflationary pressures and the overall state of the economy. Higher interest rates made borrowing money more expensive and increased the cost of carrying debt.

What about 2023?

Why credit building is more important than ever

In 2023, credit building is even more important. Here are some reasons why:

• Higher interest rates. Interest rates remain high in 2023. This makes it more expensive to borrow money. Individuals with good credit scores are better positioned to secure loans and credit cards with lower interest rates, saving them money in the long run.
• Inflation. Although trending down, inflation is also still high in 2023 and a key factor that affects the economy and personal finance. When prices are high, it can be challenging to maintain a budget and manage expenses. Individuals with good credit scores are better positioned to access credit when needed and manage their finances in the face of rising prices.
• Economic uncertainty. Although it looks like it is improving, the economy is subject to fluctuations and uncertainty. Since the pandemic it has been particularly unpredictable. Individuals with good credit scores are better positioned to weather financial storms and navigate economic uncertainty with confidence.
• Access to credit. With lenders tightening their lending standards, a credit crunch may already be underway in 2023. This makes access to credit more challenging. Those with good credit scores are more likely to qualify for loans and credit cards, giving them greater flexibility and financial freedom.

How can individuals build and maintain good credit in the face of these challenges? Here are some tips.

• Make payments on-time every time. One of the most critical factors determining your credit score is your payment history. Make sure to pay your bills on time, every time, to demonstrate your creditworthiness.
• Keep balances low. High credit card balances can hurt your credit score and make it challenging to pay off debt. Keep balances low and aim to pay off credit cards in full each month.
• Use credit wisely. Avoid opening too many credit accounts at once and use credit for necessary expenses only. Try to keep your credit utilization rate below 30%. For example, if your credit limit is $1,000, spend under $300 on your credit card.
• Monitor your credit report. Check your credit report regularly to ensure accuracy. Dispute any errors promptly.
• Consider a credit building account. If you are starting to build credit, a credit building account can be a good option.

Credit building has always been an essential aspect of personal finance, but it became even more critical in 2022 due to inflation and rising interest rates. The economic uncertainties of 2023 mean credit building remains an essential component of responsible personal finance management.

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When businesses opened up after the pandemic shutdowns, employers went on a hiring binge. More recently, we may have started to see the hangover from that binge. In 2023 unemployment remains low overall, but there are trouble spots resulting in a steady stream of high-profile layoff announcements.

Huge differences in job markets

In early 2023, the national unemployment rate dipped down to 3.4%. That’s the lowest since 1969. Low unemployment generally means it is easy for workers to find jobs. However, the job market differs from one state to another.

Unemployment rates range from a low of 2.1% in North Dakota to 5.5% in Nevada. The number of New York job openings matches the number of job seekers. Whereas, South Dakota has more than three openings for every job seeker.

If you have no luck finding a good job in your local area, consider expanding your horizons. To help you decide where to go, Credit Sesame figured out which states are the best and worst states for job seekers in 2023.

What is a good market for job seekers?

There are several data points to consider when determining the quality of the job market for job seekers.

• Unemployment rate
• Rate of new job creation
• Number of job seekers

Independently, these may be good indicators of job prospects, but considering them together gives a fuller picture. These data were used to calculate:

• The ratio of job openings to job seekers in each state. That shows the employment demand in each state relative to the available labor pool.
• The percentage change in job openings over the most recent 12 months.

These numbers were then ranked from best to worst state (1 to 51). The average of the two ranking numbers for each state gives a score that ranks the best and worst states for job seekers based on the current level of demand and the recent changes in demand.

10 best and worst states for job seekers

10 best states

The overall state ranking takes into account the number of job openings per job seeker and the recent trend in job openings. It may seem that the state with the most job openings per job seeker should rank #1, but growth in job openings is also important. Here are the top ten states for job openings, growth in job openings and overall.

1. Georgia

There are 2.7 job openings in Georgia for every person seeking work. That’s the sixth-highest ratio in the nation. Georgia also ranked sixth for growth in job openings over the past twelve months, with a 10.66% increase. Being strong in both areas earned Georgia the top ranking overall.

2. Alabama

With 2.77 openings per job-seeker, Alabama’s ratio was slightly better than Georgia’s. However, their growth in job openings over the past twelve months ranked tenth, at 7.28%.

3. Louisiana

The trend here is especially strong, with a 24.48% increase in the number of job openings over the past twelve months. That ranked second nationally. Louisiana’s ratio of 2.41 openings per job seeker ranked 14th.

4. South Dakota

This state has the best ratio of openings per job seeker, at 3.68. The only caution is that this hot job market may be poised to cool off a bit, as there was no growth in job openings over the past year.

5. Oklahoma

This was the fourth-best state in the growth of job openings, at 16.81%. The ratio of openings to job seekers is 2.36, which ranked a solid 15th.

6. Arkansas

Job openings in Arkansas increased by 17.39%, which ranked third nationally. The ratio of openings to job seekers was an 18th-ranked 2.32.

7. West Virginia

This was the number one state for growth in job openings, at 24.56%. If it can keep up that pace, West Virginia should improve its ratio of openings to job seekers, which ranked 21st at 2.30.

8. Vermont

The only northern state in the top ten, Vermont was 12th in ratio of openings to job seekers at 2.47, and 11th in growth rate of openings at 4.17%.

9. District of Columbia

The Capital District ranked 9th with a 2.6 ratio of openings to job seekers. The number of job openings was flat over the past year, but at least that’s better than the 34 states that saw a decline in openings.

10. Florida

The ratio of openings to job seekers is a 13th-ranked 2.47%. The number of openings grew just slightly, with a 0.28% increase that ranked 14th.

10 worst states

And here are the bottom ten states for job openings per job seeker, growth in job openings and overall.

42. Iowa.

Though Iowa’s 2.03 ratio of openings to job seekers was only a little below the median, its 15.45% decline in job openings is troubling.

43. Pennsylvania

The ratio of openings to job seekers ranked 40th at 1.65, and the number of openings declined by 8.1%.

44. Maine

The 2.13 ratio of openings to job seekers was around the middle of the pack, but Maine had the third biggest decline in openings at 22.22%.

45. Oregon.

This state ranked 47th with a 1.33 ratio of openings per job seeker, and the number of openings declined by 7.28%.

46. Indiana

This state had a 19.84% decline in the number of job openings – fourth worst nationally. That didn’t help its 1.94 ratio of openings per job seeker, which ranked 32nd.

47. Hawaii

The 1.66 ratio of job openings per job seeker ranked 39th, and the number of openings declined by 14.58%.

48. California

With just 1.3 job openings per job seeker, California ranked 49th. An 8.01% drop in the number of openings only makes things worse.

49. Connecticut
This state’s 1.29 ratio of openings per job seeker is better only than neighboring New York’s. With a 10.19% decrease in the number of openings over the past twelve months, that ratio doesn’t look likely to improve.

50. Michigan
The 1.39 ratio of openings to job seekers ranked 45th, and the 18.49% decline in the number of job openings was the fifth worst.

51. New York

This state has the worst ratio of openings per job seeker, at 1.12. That doesn’t look likely to get any better, because the number of openings declined by 23.52%, the second-worst rate of decrease in the nation.

Thinking of moving state?

You can improve your job prospects by moving state. However, before you pack your bags and relocate to a state with a stronger job market, consider the following:

• Skills match-up. What kind of workers are in demand in the state? If your skill set does not match those in demand, relocating may not be a wise move.
• Cost of living. This varies considerably from state to state. Beware of getting a 10% pay raise in a state with a 25% higher cost of living.
• Personal preferences. Work is important, but so are things like climate, cultural offerings, politics, and closeness to family. Deciding to move based solely on career prospects may not get the happy result you hope for.

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Inflation has been in the news a lot over the past few years and with good reason. In mid-2022 inflation reached heights not seen since 1981. Though it has subsided a little, it is still much higher than consumers–and the Federal Reserve –would like.

Inflation makes a dent in household budgets twice. The first every time you buy something, from your weekly groceries to a new car to your next vacation. The second is in the form of higher interest prices. As prices have surged, American consumers have been borrowing more to make ends meet. However, inflation also raises interest rates, so borrowing is an added cost.

Economically, this has made inflation public enemy number one. A tricky thing about dealing with inflation is that it comes in many forms. Understanding which of the different kinds of inflation are most severe and which are bucking the upward trend, can save you money.

CPI Index

When you hear someone talk about the inflation rate, chances are they mean the Consumer Price Index (CPI). The CPI is a monthly figure published by the Bureau of Labor Statistics. It is the average price paid by urban consumers for a basket of goods and services. It is an indicator of how much consumer prices have changed from month to month. It’s a useful yardstick for inflation, but it’s not the only one.

PCE Price Index

While the CPI is the most widely-quoted inflation index, the Federal Reserve generally refers to a different monthly measure, the Personal Consumption Expenditure (PCE) Price Index. The PCE looks at how much consumers are spending. Like the CPI, it averages prices on a wide variety of things people buy and weights those prices according to how much people buy. It includes a broader range of goods and services, such as health care, housing, and financial services.

PCE Price Index vs. CPI

The PCE Price Index adjusts its formula more frequently than the CPI. This allows it to capture changes in what people are buying more accurately. This is useful as consumers adjust their spending choices according to what is relatively cheap and what has become more expensive.

That may seem a subtle distinction, but making those adjustments is one way consumers deal with rising prices. That difference may be the reason why the average inflation rate measured by the PCE Price Index has been about half a percent a year lower over the past 50 years than the rate measured by the CPI.

Significantly, when the Federal Reserve talks about bringing inflation down to 2%, they’re talking about the PCE Price Index, not the CPI. Still, the CPI gets most of the press coverage.

Producer vs. consumer prices

Another inflation index you might hear about is the Producer Price Index (PPI). The PPI reflects the prices charged by the companies that produce goods and services, as opposed to the retail prices paid by consumers.

Over time, the PPI and CPI have increased at fairly similar rates. However, the PPI is considered more of a leading indicator of where inflation is going. Price trends at the producer level are more likely to be passed along to consumers than the other way around.

This is why it was considered significant that the PPI declined by 0.5% in March of 2023. That was the biggest drop in producer prices since the early months of the pandemic.

This decline in producer prices might signal a turning point in the recent inflationary trend. However, one month may be a fluke rather than a trend. But the PPI is worth watching if you want a possible sneak preview of where inflation is heading.

Core inflation

Core inflation measures the change in consumer prices except for those involving food and energy.

Excluding food and energy from any measure of inflation might seem pointless. After all, when was the last time you made it through a month without food or energy?

However, food and energy are sectors that are especially sensitive to short-term price fluctuations. In other words, these prices jump around a lot from month to month. Often, those short-term jumps aren’t indicative of the overall inflation trend.

Ultimately, core inflation is useful in measuring how broadly inflation has spread to sectors of the economy beyond food and energy. When core inflation is high, it suggests that inflation might be harder to subdue.

In March 2023, the low CPI reading of 0.1% was due in part to no increase in food prices and a 3.5% decline in energy prices during the month. However, the core inflation rate remained at 0.4%. That means inflation is likely to remain stubborn, as energy prices are unlikely to decline every month.

Eggflation and other outliers

Another thing that puts inflation in perspective is recognizing how much price changes for individual components. For example, a few months back the price of eggs rose so rapidly that the term “eggflation” was coined.

With a price increase of 36%, eggs were one of the fastest-rising components of the Consumer Price Index for the year ending March 31, 2023. In contrast, bacon dropped in price by 5.5% over the same period.

The point is, inflation doesn’t affect everything equally. Fast-rising egg prices were very noticeable because they are something many people buy every week.

At the other end of the spectrum, smartphones had the biggest price decline of any component of CPI for the year ending March 31, 2023. However, the 23.9% average decline in smartphone prices over that period would likely go unnoticed unless you happened to be buying a smartphone within the past year.

Substitution

When one good rises in price significantly consumers look for cheaper alternatives. Economists call this consumer behavior “substitution.”

For example, in the year ending March 31, 2023, the price of canned fruits and vegetables rose by 10.2% The price of frozen fruits and vegetables rose by 15.1%. Both those increases were well above the overall 5.0% rate of inflation.

Meanwhile, the average price of fresh fruits and vegetables declined over the same twelve months. That left consumers with the reasonable option of buying more fresh rather than frozen fruits and vegetables.

Understanding the different kinds of inflation can help you budget accordingly. Purchasing fresh fruit instead of frozen does not seem like too much of a hardship. Laying off eggs for a few months may be harder, but perhaps you could console yourself with a new smartphone.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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1. Bank withdrawals take a break
2. Debt and interest rates continue to rise
3. Older applicants often blocked from new mortgages
4. IMF outlook continues to get gloomier
5. Inflation eases but still threatens
6. Producer prices suggest more inflation relief on the way
7. Fed meeting notes mention the probability of recession
8. Consumers still expect to spend more despite tighter credit
9. Mortgage rates still declining but may be flattening out

1. Bank withdrawals take a break

U.S. commercial banks saw a slight increase in deposits at the end of March. That’s the first rise in deposits since two bank failures triggered a wave of withdrawals. A halt in the outflow of deposits would be a great help in stabilizing the banking system. Significantly, even small and mid-sized banks saw an increase in deposits. Comments by regulators had caused particular concern about smaller banks being more vulnerable because the government would prioritize assistance according to whether a bank was considered too big to fail. See article at Reuters.com.

2. Debt and interest rates continue to rise

Newly-updated figures from the Federal Reserve showed that non-mortgage consumer debt continued to rise in February. Overall non-mortgage debt rose at an annual rate of 3.8%, to a record high of $4.82 trillion. Revolving debt (typically credit card balances) rose at an annual rate of 5% while other debt rose at an annual rate of 3.4%. The faster growth of revolving debt is concerning because it typically carries higher interest rates than installment debt. The Fed’s latest update showed the average rate charged on credit card balances is now 20.92%. See consumer credit data at FederalReserve.gov.

3. Older applicants often blocked from new mortgages

A new study of more than 9 million mortgage applications found that older applicants are often turned down for mortgages. The study found that rejection rates rose as applicants got older, and especially once they turned age 70. Also, older applicants who were approved for mortgages generally paid higher interest rates. The study found that these obstacles face even those older borrowers with good credit records. Besides making it harder for older people to buy a home, the age barrier may make it difficult for some homeowners to use financial options like refinancing or home equity loans. See article at NYTimes.com.

4. IMF outlook continues to get gloomier

The International Monetary Fund (IMF) announced that it was lowering its global economic growth outlook for the year from 2.9% to 2.8%. This represents a continued downgrading of the IMF’s growth forecast, which a year ago stood at 3.4%. In a report that stated “the fog around the world economic outlook has thickened,” the IMF stated that the global economy faces a sustained period of mediocre growth over the next few years, with a heightened risk of descending into a recession in the near term. See article at NYTimes.com.

5. Inflation eases but still threatens

The Bureau of Labor Statistics announced that the Consumer Price Index (CPI) rose by just 0.1% in March. That was the lowest monthly reading so far in 2023, and brought the 1-year inflation rate down to 5.0%. However, there were still a couple red flags in the CPI report. The core inflation rate, which excludes the volatile food and energy sectors, was a relatively high 0.4% in March. Also, the overall CPI number benefited from a 4.6% decline in energy commodity prices during March. However, that does not reflect the impact of a recent decision by major oil producers to cut output in an attempt to boost prices. See full report at BLS.gov.

6. Producer prices suggest more inflation relief on the way

A day after the Bureau of Labor Statistics announced a mild increase in the Consumer Price Index for March, it announced that producer prices actually declined during the month. The Producer Price Index, which is a measure of wholesale costs, declined by 0.5% last month. That should ease some price pressure, especially if consumer demand slows enough for retailers to tighten their profit margins. See news release at BLS.gov.

7. Fed meeting notes mention the probability of recession

Notes from last month’s Fed meeting that were released to the public this week mention that the Fed is projecting that there will be a recession later this year. However, the comments described the recession as likely to be mild. Recent instability in the banking sector was cited as a reason for the more pessimistic outlook. It’s notable that despite recognizing the probability of a recession, the Fed still raised interest rates at its last meeting. This reflects how seriously the Fed takes the continued threat of high inflation. See article at CNN.com.

8. Consumers still expect to spend more despite tighter credit

The latest Survey of Consumer Expectations from the Federal Reserve Bank of New York showed continuing reliance on borrowing despite tighter credit standards. Consumers expect spending to grow at a faster pace than their incomes. They expect spending to grow by 5.7% over the next year, but expect household income to grow by just 3.3%. The percentage of households that said it’s harder to obtain credit now than it was a year ago has reached a new high. See survey report at NewYorkFed.org.

9. Mortgage rates still declining, but may be flattening out

30-year mortgage rates fell for a fifth consecutive week. However, the pace of declines has slowed. Last week 30-year rates fell by just 1 basis point, to 6.27%. That puts 30-year rates 0.15% lower than when 2023 began, but 1.27% higher than they were a year ago. See mortgage rate data at FreddieMac.com.

Weekly News Headlines from Credit Sesame

• Last week’s news roundup April 8, 2023
• Next week’s news roundup April 22, 2023

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The task of economic policymakers is to steer the economy into an area where it is comfortably between extremes, the so-called economic Goldilocks zone. Recent news reports indicate this may be happening. However, there have also been reminders that the economy is not in the zone yet.

What is the Goldilocks zone?

The term “Goldilocks zone” is used in the context of the economy to describe a situation where economic conditions are “just right,” neither too hot (overheating) nor too cold (in a recession or depression). A state where the economy is growing steadily but not so fast as to fuel high inflation.

The term “Goldilocks zone” was used frequently to describe the economy of the late 1990s. From 1996 through 2000, real GDP growth was never lower than 3.8% and never higher than 4.8%. Inflation was never lower than 1.6% and never higher than 3.4%. The economy was never too hot nor too cold. It was just right.

The Federal Reserve defines its monetary policy goals as striking a balance between continued high employment and low inflation. In other words, many of the Fed’s decisions are around trying to find the Goldilocks zone.

Is the U.S. headed for an economic Goldilocks zone?

Recent economic growth is not as strong as during the 1990s but real GDP has grown in 12 of the past 13 years. The only exception was in 2020, the year the pandemic struck. Does this mean the economy is just right?

Unfortunately not.

Inflation has proved to be too hot. The Fed aims to keep the long-term inflation rate around 2%. But in 2021, the inflation rate surged to 7.2% and remained high at 6.4% in 2022.

The Fed has raised interest rates to cool down demand for over a year. Interest rate hikes are the classic monetary policy tool that takes some of the steam out of inflation.

However, there is a risk that suppressing demand in this may be too successful. Choking off demand too much could result in a recession.

A U.S. economic Goldilocks zone in 2023 is one where inflation steadily declines but the economy continues to grow. Recent developments indicate that the economy might be approaching the Goldilocks zone.

1. Moderate job growth

On Friday, April 7 the Bureau of Labor Statistics announced that the U.S. economy added 236,000 jobs in March.

Inflation is fueled by high labor demand. When unemployment is very low, there aren’t nearly enough workers to fill all the open jobs. That kind of labor shortage creates wage pressure.

The March employment report was a step in the right direction because it showed employment was still growing but slower than in recent months. That suggested the economy is still expanding but at a pace that shouldn’t create as much wage pressure.

2. Job openings ease

A few days before the employment report, the Bureau of Labor Statistics reported that job openings had declined.

At 9.9 million job openings, there are still plenty of opportunities for people seeking work. However, the number of job openings eased over the most recent month and is down from where it was a year ago.

That means some of the excess labor demand is starting to work itself out of the job market. That should mean less wage pressure.

3. Inflation trends down

It was recently announced that the Personal Consumption Expenditure (PCE) Price Index increased by 0.3% in February.

That represents a slowdown from January’s increase of 0.6%. This is also a slower rate of inflation than over the past year.

The PCE Price Index is especially significant because it is the inflation measure that the Federal Reserve prefers over the Consumer Price Index (CPI).

4. Consumer spending growing at a more relaxed pace

The most recent Mastercard SpendingPulse report showed that retail spending increased by 4.7% over the past year.

That represents less spending growth than the recent trend. In fact, a 4.7% increase is lower than the recent inflation rate, suggesting that consumers are buying fewer things.

Lower consumer spending should help take the edge off inflation.

Why things are not “just right” to be an economic Goldilocks zone

While there are signs that the economy is moving towards the Goldilocks zone, there are also reminders that things are not just right, yet.

1. Inflation is lower but still too high

Whether the focus is on the PCE Price Index or the CPI, inflation is slowing but still too high. The PCE Price Index rose 5.0% over the past year, and the CPI 6.0%. Both figures are above the Fed’s target of 2% inflation.

2. Debt suggests economy may be on borrowed time

While the economy is growing, consumer debt continues to set new records.

If the economy is dependent on continued borrowing growth, eventually it has to slow down. Payments on today’s borrowing will subtract from tomorrow’s growth.

3. Banking remains a wild card

The banking system is recovering from a couple of recent high-profile bank failures. The fundamental conditions that led to those failures are may cause issues at other banks.

Bank failures do more than just disrupt the financial system. They directly impact the Fed’s policy.

Fast-rising interest rates helped cause some of the mismatches between assets and liabilities on bank balance sheets. If the Fed senses rate increases are destabilizing the banking system, it may find an important inflation-fighting tool has been blunted.

4. Less oil may mean more inflation

Leading oil producers recently announced an agreement to cut output. Their goal is to drive up oil prices. This is exactly the kind of shock that could result in a fresh boost to inflation.

Are we in the economic Goldilocks zone yet?

The economy may be approaching the Goldilocks zone, but there is no fairy tale ending in sight. Economic pressures and levers over the coming months will govern whether the economy is just right or not.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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1. Oil production cut threatens a new boost to inflation
2. Fewer job openings may reduce inflation pressures
3. Merrill Lynch hit with $9.5 million fine for not disclosing fees
4. Health Savings Accounts grew despite tough investment year
5. Failed banks have caused relatively minor damage in the past
6. Report shows slower consumer spending in March
7. 30-year mortgage rates fall while 15-year rates rise
8. Job growth slower but still solid in March

1. Oil production cut threatens a new boost to inflation

Key oil producers announced plans to reduce their oil production targets. Oil prices jumped by over 5% on the news that supply would be cut. OPEC+, which includes the traditional OPEC cartel plus other key oil producers such as Russia, announced the production cut. The move could provide fresh momentum to inflation just as the pace of price increases had started easing. See Reuters.com.

2. Fewer job openings may reduce inflation pressures

The number of job openings declined for the second consecutive month in February. The Bureau of Labor Statistics reported that there were 9.9 million jobs open at the end of February. That’s a significant decline from the 11.6 million jobs open a year earlier. The latest figure marks the first time the number of job openings has been below 10 million since May of 2021. Despite the recent downward trend, the number of job openings is still very high relative to the number of job seekers. Even so, any easing of labor demand may reduce inflation pressure. That in turn would allow the Federal Reserve to take a less aggressive approach to raising interest rates. See article at Yahoo.com.

3. Merrill Lynch hit with $9.5 million fine for not disclosing fees

The Securities and Exchange Commission (SEC) and Merrill Lynch have reached a $9.5 million settlement over an accusation of inadequate fee disclosure. The SEC alleges that Merrill did not fully disclose charges on foreign exchange trades. The settlement includes giving back $4.1 million that Merrill earned on those charges plus interest and a civil penalty of $4.8 million. See article at Reuters.com.

4. Health Savings Accounts grew despite tough investment year

Both the value of assets in Health Savings Accounts (HSAs) and the number of HSAs grew in 2022, according to a newly-released study. Assets grew by 6% during 2022 to a total of $104 billion, despite a generally poor year for financial markets. This asset growth during a down year was largely driven by new accounts and contributions to existing accounts. The number of HSAs grew by 9%, to a total of 35.5 million. Meanwhile, HSA owners contributed a net total of $13 billion to their accounts. HSAs are a tax-advantaged way of putting aside money for both short-term and long-term healthcare expenses. See article at ABA.com.

5. Failed banks have caused relatively minor damage in the past

An analysis by The Basis Point found that from the more than 560 banks that have failed since 2001, only 7% of deposits were not taken up by another bank. This is an important reminder that failed banks generally have substantial assets to offset most of their liabilities. When a bank fails its assets are often acquired by another bank, which also assumes responsibility for at least a portion of the deposits. This reduces the stress on the FDIC insurance fund. It also leaves uninsured assets less fully exposed to bank failures. See data from TheBasisPoint.com.

6. Report shows slower consumer spending in March

The latest Mastercard SpendingPulse report showed that U.S. retail sales rose by 4.7% in the twelve months through March. This represents a slowdown in the pace of consumer spending after a 6.9% year-over-year increase through February. 4.7% would also suggest that consumer spending has not kept up with the recent rate of inflation. Online sales grew much faster than in-person sales. E-commerce sales were up by 13.0% compared with just 2.8% for in-store sales. See details at Mastercard.com.

7. 30-year mortgage rates fall while 15-year rates rise

30-year mortgage rates had their fourth consecutive weekly decline. They fell by 0.04% last week, to 6.28%. They are now 0.14% lower than they were when 2023 began. In contrast, 15-year mortgage rates increased last week. 15-year rates rose by 0.08% to 5.64%. 15-year rates are now 0.04% lower than they were at the start of this year. See rate information at FreddieMac.com.

8. Job growth slower but still solid in March

The Bureau of Labor Statistics reported that employment grew by 236,000 jobs in March. That’s a slowdown from February’s figure of 326,000 and from the average job growth of 334,000 over the past six months. This might fit the latest report into the “Goldilocks” zone, where job growth is just right – not so hot as to fuel further inflation, but not so cool as to suggest the economy has slipped into recession. See full report at BLS.gov.

Weekly News Headlines from Credit Sesame

• Last week’s news roundup April 1, 2023
• Next week’s news roundup April 15, 2023

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The number of new credit accounts opened has reached its lowest level since the height of the pandemic shutdowns in the spring of 2020. According to the February 2023 VantageScore CreditGauge report, the fall-off in new credit activity reflects a more cautious approach on the part of lenders.

When lenders become more cautious, they tighten credit standards. For consumers, this means credit is likely to be tougher to get and more expensive in the months ahead. Anyone planning on applying for credit, whether a mortgage, any other type of loan or a new credit card, should take note.

Recent trends in new credit

The VantageScore CreditGauge report is significant because VantageScore is a joint venture of the three major credit reporting bureaus: Equifax, Experian and TransUnion. Their information is used by thousands of lenders, and VantageScore estimates they have credit data on 94% of the adult U.S. population.

The VantageScore CreditGauge report gathers information from consumers and lenders, and in turn provides information that lenders use to guide their decisions. This includes things like credit score trends, types of new credit activity and delinquency rates.

One of the things the report tracks is new account activity. The number of new loans and credit card accounts being opened indicates how readily available credit is. The recent trend points to significantly less new account activity.

The percentage of consumers opening new credit accounts has fallen for four of the past five months. At 5.6%, this new account activity rate is lower than the peak of 7.7% reached in December of 2021.

The slowdown has affected most types of credit. New mortgage, credit card and personal loan accounts all declined in February. Only auto loans held steady.

What lenders are seeing

Credit scores alone do not explain why lenders are becoming more cautious. In fact, the average VantageScore for U.S. consumers has risen in each of the last two months.

As important as credit scores are, they don’t tell the whole story. Credit scores are largely backward-looking. Much of the information that goes into them is based on past behavior like payment history and when accounts opened and closed.

While the track record of how consumers use credit is significant, lenders also have to look ahead and anticipate emerging trends. For example, one thing the CreditGauge report measures is the percentage of consumer accounts that are delinquent. That means that payments are overdue.

The percentage of consumer credit accounts that are between 30 and 59 days overdue has risen steadily since May of 2021. It has more than doubled in that time. While it’s by no means at a record level, it’s safe to say that lenders don’t like where it’s heading.

Seeing more consumers fall behind on their payments is especially troubling given that the amount of consumer debt is at an all-time high, according to the Federal Reserve Bank of New York. On top of that, sharply-rising interest rates have made debt much more expensive.

Credit and economic cycles

Rising delinquency levels, record debt levels and higher interest rates are worrying enough. On top of those conditions, another thing that may be making lenders more cautious is the threat of a recession.

Financial institutions are happy to lend money when the economy is growing. People spend more and generally do not have trouble making their payments.

When the economy turns sour and unemployment rises more consumers cannot pay their bills. Lenders start losing money on some of their loans and credit cards. This makes them pickier about who they risk lending money to.

As of the fourth quarter of 2022, the U.S. economy was still growing. However growth was slow last year, and rising interest rates are a stiffening headwind for the economy. Looking ahead to the possibility of tougher times may be making lenders more risk-averse.

Impact of bank failures

Another factor that might impact lending behavior is the recent failure of two banks and concern that similar difficulties might strike other banks.

In large part, those failures were brought about by a mismatch between the value of deposits and the value of loans and investments made by those banks. Banks function by using customer deposits to make profitable loans and investments.

However, a bank’s profit margin dries up if more loans go bad. Recent bank failures may prompt more banks to take a critical look at their loan portfolios’ riskiness. The outcome may be to approve fewer risky loans and credit card accounts.

What tighter credit standards mean to consumers

When lenders become more cautious, people who previously may have qualified for credit are now turned down. It also means that consumers with less than excellent credit will be charged higher interest rates to cover the risk.

Tighter credit standards could mean it takes higher credit scores to qualify for credit and to get the best credit terms. Other standards that could be affected include loan-to-value ratios and debt-to-income ratios. More cautious lenders would likely demand lower, less risky ratios in both cases.

Who is likely to be most affected

Rising interest rates have already impacted new credit users in general. However, people with excellent credit, such as FICO scores in the high 700s or better, may not be impacted much by tightening credit standards.

Borrowers a notch below that, say in the 670 to 780 credit score range, are still likely to qualify for credit easily. However, the extra interest they pay may increase compared to the customers with the best credit.

People with borderline credit are the most likely to be affected. These are so-called near-prime customers, including those with credit scores of around 600 to 670. Tighter credit standards may make the difference between qualifying and not qualifying for credit for these customers.

While not being able to qualify for credit may cause some hardships, it may not be such a bad thing in some cases. The same things that are making lenders more cautious should also make potential borrowers think twice.

If higher interest rates and a dodgy economy make it harder for consumers to afford credit, this may be a good time to slow down borrowing plans. Putting off borrowing long enough to improve their credit scores might be healthy for many consumers.

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On March 22, the Federal Open Market Committee (FOMC) announced that it was raising the Fed funds rate by 0.25%. This small increase says a lot about the conflicting issues the Fed is juggling.

In the twelve months up to March 2023, the Fed’s rate decisions have been guided by the need to cool down inflation without choking off economic growth too severely. That’s a difficult balance to strike, The recent failures of several high-profile banks–and the fear of more to follow–make the Fed’s job even more complicated.

Higher rate hike expected before failing banks

In the run-up to the latest FOMC meeting, it was widely expected that the Fed would raise rates by 0.50%. By way of background, the Fed has raised rates steadily over the past year to tame inflation, with limited success.

The Personal Consumption Expenditures Price Index, the Fed’s preferred measure of inflation, gave an unexpectedly hot reading for January with a 0.6% increase. This indicated that inflation persists.

Meanwhile, the job market has stayed strong so far in 2023. The Fed has conceded that it’s prepared to put up with some job losses in its efforts to slow inflation, but so far that hasn’t happened.

Perhaps the most compelling reason to have expected a bigger rate increase from the Fed was because borrowing has continued to soar. Each new report shows consumer debt, particularly credit card debt, setting a new record high.

If the idea is that raising interest rates discourages borrowing and reduces the demand helping to drive inflation, it hasn’t worked so far.

In short, when March began the stage seemed set for the Fed to raise rates by 0.50% at the FOMC meeting. Then the bank failures hit.

Did previous rate hikes contribute to bank failures?

The failure of Signature Bank and Silicon Valley Bank raised concerns about whether other banks might follow. That threat is enough to make the Fed tread carefully. It must consider whether its monetary policy measures might disrupt the financial system.

That concern is especially understandable under the circumstances. There is a relationship between interest rate increases and the liquidity problems experienced by some banks.

How interest rates affect bank profitability

One reason banks are generally profitable is that they get to pay short-term interest rates to depositors while earning long-term rates on loans and investments. This normally works to their advantage because long-term interest rates are usually higher than short-term rates.

This model has broken down recently because of the rapid rise in interest rates.

The surge in short-term rates over the past year has caused an inverted yield curve. That’s economist-speak for saying that short-term rates are now higher than long-term rates.

An inverted yield curve erodes the normal profitability of the spread between long-term and short-term rates. Worse, much of the money banks earn is locked up in loans and investments at rates set before rates started rising. Meanwhile, most deposit rates reset frequently. This has made the rates banks earn even less competitive with the rates they pay depositors.

Is the Fed to blame for failing banks?

Under the circumstances, it is clear why the Fed may want to slow its rate increases. However, it is a mistake to blame the Fed for the predicament of some banks. Here’s why:

• People incorrectly assume that the Fed has total control over interest rates. The fact is, when inflation rises, lenders and investors demand higher rates to cover the cost of inflation. Therefore, market rates rise regardless of what the Fed does.
• In its public announcements and multi-year rate projections, the Fed has been very transparent about its intentions to raise rates. Financial professionals who did not see this situation coming and respond accordingly are perhaps more to blame than the Fed.

Projections suggest rates don’t have much further to rise

The FOMC updated the Fed’s rate projections at its most recent meetings and expects rates to rise to 5.1% by the end of 2023. That’s a little higher than the current target range of 4.75% to 5.0%. But that does not preclude the possibility of the Fed pushing rates higher in the next few months, with the hope of lowering them by the end of the year.

Note also, that projections are subject to revision. While the Fed did not raise its rate projection in the recent meeting, it did increase its estimate of year-end inflation.

Normally, a higher rate expectation would go hand-in-hand with a higher inflation expectation. In this case, it’s entirely possible that the Fed held off on raising its projection to avoid disrupting the banking sector at a sensitive time.

What does this mean for the fight against inflation?

Despite the milder-than-expected rate hike, the FOMC’s statement after its last meeting reiterated that it is strongly committed to bringing inflation down to its 2% target.

Banking instability adds a wild card to that challenge. The Fed already walked a tightrope between dampening borrowing demand and avoiding a recession. The Fed’s updated projections show weaker growth and stronger inflation than previously expected. This underscores how tough that balancing act is. Now the FOMC has to focus on how much its rate hikes might jeopardize the banking sector.

Ironically, recent bank problems might assist with the goal of slowing consumer borrowing. When banks have balance sheet concerns they become more cautious about lending. Fewer consumers qualifying for borrowing might do what raising interest rates has so far failed to do.

Between higher interest rates and stricter lending standards, consumers may have to get used to borrowing less.

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