The entrenched K-shaped U.S. economy, where higher earners continue to spend and borrow on an upward trajectory, while lower earners struggle to do the same, is having ongoing performance implications for various consumer ABS asset classes.
"We are continuing to see the impact of what we call the K-shaped economy, seeing it primarily in the auto space where super prime auto is holding up well," said Amy Martin, a managing director from Standard & Poor's.
There has been some weakness in the higher-loss prime segment, which consists primarily of asset pools backed entirely by used vehicle loans. While borrowers in this segment are considered prime based on FICO scores, their status as renters and the almost exclusive focus on used vehicles in these pools suggest increased sensitivity to inflationary pressures.
Credit performance is likely to remain generally stable but more dispersed.
Although inflation rates have moderated, the prices of goods have not fallen, leaving these consumers struggling to keep up with everyday expenses. S&P is seeing the most weakness in the subprime auto ABS segment, Martin said.
Affordability is the key issue
Armine Karajyan, the Global Head of Structured Finance Research at KBRA, said higher-for-longer rates would keep pressure on consumer ABS sectors primarily due to its impact on monthly affordability of living expenses and debt service, rather than through household leverage alone.
The rating agency noted that household debt to disposable income declined to 0.8x in Q2 2025, but household debt service rose to 11.25% of disposable income, reflecting elevated borrowing costs and higher monthly payments.
"That leaves thinner cushions for lower-income and subprime borrowers, even if the aggregate consumer balance sheet remains relatively healthy," Karajyan stated. "For ABS, that means credit performance is likely to remain generally stable but more dispersed. Prime collateral should remain better supported, while affordability-sensitive sectors and lower-FICO borrowers bear more of the strain."
A less resilient economy
Under the current rate environment, the economy is showing signs of vulnerability.
The U.S. savings rate is almost at an all-time low
Clayton Triick, head of portfolio management at Angel Oak Capital Advisors believes many strategists underestimate the current strains on the economy.
"One factor is that the U.S. savings rate is almost at an all-time low. It is at the same level that we saw in 2021 with what we called [post-COVID] revenge spending, and similar to 2006, when homeowners used their houses as ATMs, and then the dot-com boom."
The low savings rate, coupled with rising delinquencies, the growth in credit card lending, and the increased utilization of buy now, pay later loans, creates a scenario that makes his group very cautious.
The economy's current lack of resilience is "why we really like homeowner mortgage credit. That is one segment where we think lending is very conservative, and the credit box has been very tight."
Home prices dropping by 10% is effectively a non-event because of untapped equity levels that borrowers have in their homes."
Triick believes the K-shaped economy will persist, as the wealth gap continues to widen due to a strong stock market that primarily benefits higher-income segments. He expects this gap to narrow as wage inflation rises among lower-income cohorts and equity values normalize.
The normalization will be seen in stocks before bonds, which will drive the wealth gap tighter because the top part will come back to normal. That's more likely to happen, especially if the Fed has to increase rates in response to higher inflation. We are talking to investors about bonds right now as an area that's really attractive. It's tough to push for bonds at 2% to 5% rates across the U.S. fixed income pre-2022, but now investors get 6% to 10%, which offers a strong return in an environment where equities are stretched."
Mixed bag
The current economic picture presents a complicated picture, industry analysts say.
"Overall, the unemployment rate remains relatively low at around 4.3%," Martin said. However, the data indicate that unemployed people are staying out of work longer and it's taking more time to find employment.
Karajyan said consumer ABS collateral performance is best described as normalizing, not collapsing.
KBRA's 2026 ABS Outlook says household delinquencies and charge-offs have increased from post-pandemic lows, albeit slowly, and ABS credit performance remains generally solid. The main stress points are subprime auto and unsecured consumer loans, while broader ratings performance has remained stable.
For instance, from January through October 2025, KBRA's ABS surveillance universe saw 76.9% affirmations, 19.1% upgrades, and 3.9% downgrades, with most downgrades concentrated in non-prime auto and solar ABS.
