American households seem to have short financial memories. Not having learned—or perhaps just not remembering—the lessons of the global financial crisis of 2008–09, many U.S. households are repeating the same mistakes made more than 15 years ago. Specifically, they are aggressively spending and piling on debt just at the moment when they should be prudently cutting back on both.
Personal consumption expenditures of goods increased by 3.8 percent in the fourth quarter of 2023, outpacing the overall U.S. gross domestic product (GDP) growth of 3.3 percent. There is nothing inherently wrong with spending more if rising income can support it, but this is not what is happening. According to data from the Bureau of Economic Analysis, in 2023, personal spending grew at more than twice the rate of personal income.
This increased spending is supported not by income but by debt. According to the Federal Reserve Bank of New York’s most recent quarterly report on household debt and credit, by the end of 2023, total household debt increased to a record high of $17.5 trillion. This is a 24 percent increase from pre-pandemic levels at year-end 2019 and 3.6 percent higher than just one year ago. Most ($12.3 trillion) of this debt reflects mortgage balances, but auto loans and student debt each contribute $1.6 trillion, and credit cards more than $1.1 trillion, of additional consumer debt. Notably, credit card balances grew by 4.6 percent in the fourth quarter, while consumer spending grew by only 0.7 percent—a warning sign that the consumer is stressed and using more debt to make regular purchases.
What makes this trend dangerous is not just the total amount of debt but the fact that while household debt has grown at 5.5 percent per year (more than $3 trillion) since 2019, real personal income has only grown by 1.9 percent per year over the same period. In other words, households are more indebted both in absolute terms and relative to their income than they were before the lockdown-induced recession of 2020.
Other indications of Americans’ financial distress include that they are both saving less relative to their income and dipping into existing savings to try to make ends meet. The personal savings rate for U.S. households fell to 3.9 percent in December 2023 from 5.3 percent in May 2023. Compared with pre-pandemic levels above 8 percent, recent figures represent the lowest personal savings rates since before the global financial crisis, when households were stressed by rising adjustable-rate mortgages on homes they simply could not afford. Not only are they saving less but Americans are also depleting their savings accounts. Aggregate personal savings have fallen by more than 27 percent since December 2019. This cannot continue for much longer.
This comes at a time when the debt-service burden for many families has increased from the resumption of student loan repayments. The moratorium on federal student debt repayments put in place in 2020 ended in September 2023. There is no way to know whether consumers are making these payments because, according to the Fed’s report, “missed federal student loan payments will not be reported to credit bureaus” until the fourth quarter of 2024. Nonetheless, it is reasonable to assume that many student loan debtors are already falling behind on their payments.
With interest rates rising rapidly over the past two years, the cost of consumer debt service has risen accordingly. The average cost of credit card debt is now approaching 28 percent, compared with less than 23 percent last year. In either case, credit card debt quickly spirals out of control if left unpaid. U.S. households are increasingly finding themselves trapped in a vicious cycle of indebtedness.
Bidenomics is having the same effect on households as it has had on the U.S. government. Both are living beyond their means and spending money that they do not have. This is the same thing as giving up on consumption tomorrow for more of it today. It is paying for today’s fleeting pleasures at the cost of tomorrow’s lasting prosperity.
Spending someone else’s money creates the illusion of wealth and prosperity, but sooner or later, life’s realities (and creditors) intervene. The ability to access ever-increasing lines of credit and diminishing savings will dry up, and households—unlike the U.S. government, which can print its own money, at least for a time—will have no way out.
Eventually, the party will end, and the hangover will be painful.
