Record Household Debt Suggests Consumers Facing Financial Strain

Sales advertisement at a shop in the Fashion Centre at Pentagon City shopping mall in Arlington, Va., on Jan 3, 2024. Madalina Vasiliu/The Epoch Times

The U.S. economy has stumped observers and defied recession calls. Despite the plethora of headwinds threatening the world’s largest economy, from soaring borrowing costs to inflationary pressures, the country has witnessed better-than-expected gross domestic product (GDP) readings and strong labor market conditions.

Experts have rationalized the hot data by alluding to resilient consumers.

Aside from the uptick in consumer confidence in the past few months, the public has been chiefly sour on the present economic landscape. However, the widespread pessimism and broader financial challenges haven’t stopped shoppers from spending at the nearby mall or visiting Amazon.

A November 2023 report by Intuit Credit Karma found that more than one-quarter of Americans are “doom spending.” This is when consumers spend money amid concerns surrounding the economy and geopolitical strife.

“Much like doom scrolling, we’re seeing people mindlessly shop to soothe concerns about the economy and foreign affairs, which could take a toll on their financial wellbeing,” said Courtney Alev, Credit Karma’s consumer financial advocate.

This behavior is reflected in the official government data.

In the fourth quarter, total credit card debt surged by $50 billion to $1.13 trillion, according to the Federal Reserve Bank of New York’s quarterly Household Debt and Credit Report. In total, household debt has reached an all-time high of $17.5 trillion.

Census Bureau figures showed the retail trade was impressive in 2023 as sales climbed for most of the year, including a six-month streak from April 2023 to September 2023.

Overall, individuals leaped over various hurdles, be it sky-high interest rates or rising costs. But while last year’s marketplace trends have supported the soft-landing narrative, experts warn that consumers are increasingly being tapped out and that the lagged effect of the Federal Reserve’s monetary policy tightening is appearing.

The rocketing levels of debt suggest that consumers are “heavily reliant on borrowing” and reveal “the role of credit in maintaining current living standards,” according to Taylor Kovar, CEO and founder of Kovar Wealth Management.

“This high level of debt suggests that many consumers might be stretched thin financially, potentially limiting their ability to handle unexpected expenses or economic downturns,” Mr. Kovar told The Epoch Times.

Spending More Like a Responsible Sailor

Are pockets of weak spending showing up in the latest statistics?

Last month, retail sales tumbled by 0.8 percent, down from the 0.4 percent bump in December 2023 and worse than the consensus estimate of negative 0.1 percent. This represented the largest drop in retail trade since March 2023.

The industry, including Mastercard and Visa, blamed the frigid temperatures and heavy snowfall for the worse-than-expected numbers. But consumers could also be becoming more conscious about the wider developments, according to Ted Rossman, a senior industry analyst at Bankrate.

A credit card is placed into a credit card machine for processing payments in La Puente, Calif., on Sept. 11, 2023. FREDERIC J. BROWN/AFP via Getty Images

“It’s also possible that consumers are hunkering down after a holiday debt hangover,” Mr. Rossman said in a statement. “Americans ran up record-high credit card balances during the fourth quarter. And with record-high credit card rates adding insult to injury, it’s practical to spend less—even if that’s not great news for our consumer-driven economy. More people are carrying more debt at higher rates for longer periods of time.”

The median interest rate for credit cards is more than 24 percent. A recent Bankrate credit card survey found that 49 percent of cardholders are carrying balances from month to month.

The tepid jump in revolving (credit cards) and nonrevolving (auto and student loans) credit was a significant surprise in the consumer credit market. In December 2023, the Fed reported that total consumer credit rose by just $1.56 billion, falling short of the market forecast of $16 billion. This was also sharply down from the massive $23.48 billion gain in November 2023.

According to the Fed’s quarterly senior loan officer opinion survey, banks experienced “weaker demand” for credit cards, auto loans, and other consumer loans. Although there was lower demand in the October 2023 to December 2023 span, “banks reported expecting loan demand to strengthen across all loan categories” in 2024.

Heading into 2024, economists expect real consumer spending to begin to inch downward as pandemic-era savings are exhausted and debt servicing payments intensify. Although they still anticipate that consumers will keep spending, it will be at a slower pace than in the past couple of years.

Fitch Ratings adjusted its consumption trends higher in an update to its U.S. Consumer Health Monitor. Because of robust income gains, resilient household balance sheets, and improving consumer sentiment, real (inflation-adjusted) consumer spending will grow by 1.3 percent, up from the previous projection of 0.6 percent.

“The strength of the U.S. economy reflects renewed fiscal easing, consumers’ willingness to continue drawing on excess savings, strong household balance sheet fundamentals and a tight labor market,” Olu Sonola, head of Fitch U.S. economic research, said in the report.

While the consumer credit market is far from collapsing, Mr. Kovar noted that many signals highlight that consumers’ appetites for borrowing are easing, from fewer mortgage applications to a general tightening of consumer credit usage.

“Economic uncertainties, higher interest rates, or a shift in consumer sentiment towards saving rather than spending could all contribute to a slowdown in borrowing,” he said.

Impacts on the Economy

How will this impact growth over the next year for a national economy that is dependent on two-thirds consumption?

The effects of such a slowdown in consumer spending on the U.S. economic landscape remain unclear.

“Should consumers decide to borrow less, it could have a mixed impact on the U.S. economy,” Mr. Kovar said. “On one hand, reduced borrowing could lead to lower consumer spending, which might slow economic growth since consumer spending is a significant component of GDP.”

In the last quarter, personal consumption expenditures swelled by 2.8 percent, accounting for 58 percent of growth.

Historically, a decline in consumer spending doesn’t imply a low recession probability, according to Dallas Fed staff economists.

“Looking at historical data, however, we document that consumption was not a main driver of GDP declines in previous recessions and that a recession is not necessarily preceded by declines in consumer spending,” they wrote in a February paper. “Given consumer spending’s dominant share in the U.S. economy (about two-thirds), one would expect consumption to be a main contributor to GDP declines in a typical recession. This is not the case.”

The primary contributor to a downturn is ostensibly a decline in real private fixed investment (business and residential investment) as this metric “fell in every recession and tended to be the key driver of GDP declines during recessions,” the regional central bank stated. This represented, on average, 93 percent of the 1.7-percentage-point GDP decrease in a recession.

A reduction in consumer spending and a diminished reliance on debt “could lead to more financially stable households in the long term” that could prevent a debt-fueled financial crisis, Mr. Kovar noted.

“A shift towards saving could also increase the pool of domestic capital available for investment, potentially supporting economic growth in other areas,” he said.

The personal savings rate has plummeted since the record high achieved during the COVID-19 pandemic. In December 2023, it fell below 4 percent and has been on a downward trajectory since recovering to above 5 percent in March 2023.

Whether this is the start of a slowdown in consumer spending or a blip in the long-term trend, the U.S. economy is still seen recording a vigorous expansion in the current quarter.

The Atlanta Fed’s GDPNow model estimates a 2.9 percent reading in the first three months of 2024.

For many market observers, the key question over the next year will be: Will consumers continue to prop up the U.S. economy?