Capital Markets Update #29

This week we thought we’d focus on a narrow topic defined by the relative health of the US low-income consumer.  Importantly, we’re focused on whether low-income consumers have experienced an improvement in economic wellbeing in accordance with growth in the US economy.  The relationship is certainly not formulaic.  Average annual expenditures for the lowest and second lowest income quintiles hover around $35k and $50k respectively (12/2025 BEA Analysis).  The BEA survey accounts for approximately 135.7MM consumer units (i.e. consumers earning incomes) meaning the lowest 40% of consumers earning income in the United States account for approximately 12.5% of total expenditures, on average.  Thus, obviously, lower-income consumers have a disproportionately small impact on the entirety of the overall US dataset.  Therefore, broader trends do not apply evenly across society – that’s capitalism and, frankly, a democracy for you.  We all have a choice as to who we want to be in America.  But, it’s important to evaluate this consumer segment’s overall health.  Understandably, underlying stress and insolvency is likely to show up amongst this consumer segment first before it metastasizes into the larger US consumer dataset.

One way to evaluate this segment of society’s performance is to look at Bank of America low-income consumer financial health metrics which are all positive, in their own right.  According to BofA, low-income consumer spending growth exceeded middle and high-income spending growth (excluding top 5% spending) in the month of July 2026. Low-income accounts exhibited 5.4% YoY total spending growth and showed little to no falloff in growth of discretionary as compared to overall spending.  After tax wage growth for low-income households rose faster than all other income segments, increasing 5.2% YoY vs 4.2% YoY growth for middle-income earners.  The title of BofA’s most recent July 2026 Consumer Checkpoint dataset was “The Great Convergence;” convergence being the antithesis of a disparity or “K-Shape” and in direct reference to strong consumer health metrics across the income spectrum.  Share of lower-income households paying off their full credit card bill each month has increased like clockwork since 2019, while lower and middle-income households continue to hold onto an elevated checking account balance compared to inflation-adjusted pre-covid levels.  An exceptionally strong report overall, by nearly any metric.  Additionally, it’s impossible to represent the BofA customer, and therefore this dataset, as an imperfect abstraction of American society.  BofA has 68 million individual customer accounts and cut their low / middle / high-income thresholds evenly (i.e. 68MM divided by three).  According to BofA, its low-income cut includes approximately 22.5MM accounts which exhibit average incomes of less than ~$50k/yr.  This is quite on balance with national statistics.     

We can delve into the health of this low-income segment with a more discerning tool: default rates of public, short-term consumer lending platforms.  Quarterly reports from the likes of Klarna and Affirm are most helpful here.  According to Klarna, the delinquency rate on buy-now-pay-later loans fell to 0.88% amongst its 100 million customers, a 15bp YoY improvement.   A record number of transactions were repaid on time across both higher and lower-value purchases, while fixed-term delinquency rates of approximately 2.18% were roughly flat YoY. Affirm’s 30-day delinquency rate was approximately 2.5%, down from 2.6% in March 2026, but up from about 2.4% in July 2025.  Consider this, Affirm’s 2.5% default rate accounts for the fact that 44% of Affirm’s customers are considered non-prime, with FICO scores below 650 (Affirm Q3 presentation).

On an aggregate basis, the Fed credit card delinquency rate has both bent and exhibited a notable 2-years of sequential improvement.  Delinquency rates on all credit card loans are down from a 15-year high of 3.22% in Q1 2024 to approximately 2.85% in Q2 2026 (FRED).  While this is still up from 2.60% in Q4 2019, the overall delinquency rate remains sustainable.  For reference, delinquency rates from 2000 – 2007 hovered between 4.00% - 5.00%, as they did throughout much of the 1990’s.  Non-business bankruptcies (that woudl be personal bankrupcies) are about 25% below pre-covid levels with 2015 - 2019 non-business bankruptcies averaging around 750k/yr while 2025 bankruptcies totaled 575k. 

We’re heartened by the fact that the conversation around consumer health is turning.  Thankfully, data supports the assertion that the US consumer remains healthy across all-income segments.  Furthermore, it’s hard to find any data to support the conclusion that a strong US economy is failing to improve the lives of all Americans.  If you save and invest in stocks, you’ll disproportionately accrete wealth.  As we’ve written about in the past and was supported by the BEA’s 12/2025 analysis, the average income earning household can save about $20k/yr after contributing about $10k/year to life insurance and personal pension accounts.   In 15-years, this household would have a lifechanging $635k in savings, assuming a 10% CAGR in the equity markets.  This is the math, this is why the suspiciously named “Trump Accounts” are the best invention for low and middle income households ever, and why the lack of ubiquitous financial literacy courses remains the biggest shortfall of highschools across America.