Pressure on household budgets is intensifying as prices, borrowing costs, and basic expenses weigh on families with modest incomes. Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, warned that mid- to lower-income Americans face an “affordability crisis,” adding that signs of credit strain are no longer subtle.
“Mid- to lower-income households are struggling with an ‘affordability crisis.’ Credit stress is ‘flashing yellow.’” — Lisa Shalett, Morgan Stanley Wealth Management
The caution comes as consumers navigate higher interest rates and persistently elevated living costs. Her remarks suggest growing financial stress could slow spending, challenge lenders, and test policymakers as the year closes.
Rising Costs and Thinner Buffers
Prices for essentials such as food, rent, and insurance have climbed in recent years. While inflation has cooled from its peak, many families still pay much more than they did before the pandemic. Wage gains have helped, but not for everyone and not across all regions.
Higher borrowing costs deepen the strain. Credit card interest rates have hovered near historic highs, and auto loans have become more expensive. Households that tapped savings during the pandemic now have less cushion. The restart of student loan payments tightened budgets further for millions of borrowers.
Public data from the Federal Reserve and banking regulators show rising delinquency rates on credit cards and auto loans, especially among younger and lower-income borrowers. That trend lines up with Shalett’s warning about “flashing yellow” credit signals.
Where Stress Is Showing Up
Economists and lenders point to several pressure points that match a broader affordability squeeze.
- Credit card balances have increased, and missed payments are up from recent lows.
- Auto loan delinquencies have risen as monthly payments stretch budgets.
- Buy-now, pay-later usage has broadened, hinting at cash-flow gaps.
- Rent and insurance premiums have outpaced many paychecks.
Retailers focused on value report shoppers trading down to cheaper brands or waiting for discounts. Some banks have increased loss reserves, citing normalization of credit after unusually strong performance during the pandemic stimulus period.
Counterpoints: A Resilient Job Market
Not everyone sees a downturn ahead. The labor market remains tight by historical standards, with unemployment still low. Wages are higher than they were a few years ago, and many households refinanced mortgages at low rates earlier in the decade, keeping housing costs stable for those owners.
Some analysts argue that consumer spending can continue, even if more slowly, as income growth and job availability offset higher prices for many families. They note that the most pronounced credit stress is concentrated among lower-income borrowers, rather than across the entire consumer base.
Implications for Banks, Retailers, and Policy
For lenders, rising delinquencies could mean tighter underwriting and higher provisioning for losses. That can restrict access to credit for riskier borrowers, creating a feedback loop that further slows spending.
Retailers may see mixed results. Discounters and grocers could hold up as shoppers prioritize essentials. Sellers of big-ticket items may face softer demand if financing costs stay high.
Policymakers face a delicate balance. If inflation continues to cool, rate cuts later on could ease borrowing costs and stabilize household finances. If price pressures linger, the central bank could stay cautious, extending the period of tight credit conditions.
What to Watch in the Months Ahead
Several markers will show whether the warning turns into a broader slowdown:
- Changes in credit card and auto loan delinquency rates.
- Retail sales trends, especially for discretionary goods.
- Income growth relative to inflation, particularly for lower-wage workers.
- Policy signals on interest rates and any targeted relief measures.
Shalett’s message is straightforward: Stress is building where budgets are leanest. The next phase will depend on the path of inflation, the timing of any rate changes, and whether employers keep hiring. For now, consumers at the lower end of the income spectrum look most exposed, and that makes their spending patterns a vital gauge for the broader economy.
