Consumers have been propping up the American economy when no one else could — and now debt is being called in and they can’t pay their bills

Consumers have been propping up the American economy when no one else could — and now debt is being called in and they can’t pay their bills

The US economy has remained resilient in the wake of the pandemic thanks to Americans’ sheer will to spend, but debt is rising, and many are running out of cash reserves to pay their bills.

According to a report published by the Federal Reserve Bank of New York on Tuesday, Americans now collectively owe $1.08 trillion on their credit cards — the highest amount ever documented.

In the three months to the end of September, credit card balances increased by 4.7% – or $48 billion – the report revealed, representing the largest quarterly jump in credit card debt since records began in 1999.

In a separate report published at the end of October, the Consumer Financial Protection Bureau found that credit card companies charged consumers a record $130 billion in interest and fees in 2022. The Consumer Financial Protection Bureau found that last year, the average minimum payment due On consumers credit card bills have risen to $100 per month.

Since the third quarter of this year marks the eighth straight quarter of annual increases in U.S. credit card balances, minimum payments have likely increased even more since the end of last year.

Struggling to pay

A New York Fed report showed that consumers are already struggling to make their credit card payments, with delinquency rates on the rise.

The CFPB’s October report noted that credit card delinquencies have been on the rise since COVID-19-related financial relief ended, with higher prices and interest rates also playing a role.

“When real interest rates rise or commodity prices rise faster than wages, consumers will have difficulty paying down existing balances without cutting expenses or receiving a windfall,” the report authors wrote.

The increased reliance on credit cards — and difficulties paying off balances — could spell trouble for the broader U.S. economy, which has been heavily reliant on consumers over the past two years.

Consumer spending, coupled with a strong labor market, has helped the US economy remain unexpectedly resilient, even in the face of rising costs of living and increasingly tight monetary policy by the Federal Reserve.

This strength has continued into 2023, leading to stronger-than-expected GDP growth in September and prompting the White House Council of Economic Advisers to describe consumers as a “prominent force.”

However, for many prominent market watchers, the question has become when, not if, consumers will become more reluctant to spend their money — and receiving increasingly large credit card bills each month could weigh on sentiment.

While credit card balances have reached a new high, Americans’ debt as a percentage of disposable income is “nowhere near” the highs they had been in, Stephane Renvier, senior global markets analyst at financial intelligence platform Finimize, said in an email on Wednesday. She is seen in the foreground. – Until the financial crisis of 2008.

He added: “Credit card debt does not represent a large portion of consumers’ purchasing power.” “To put it more simply, this is not 2007 again.”

However, he acknowledged that the data published Tuesday may be cause for concern.

He added: “This indicates that problems may be brewing beneath the surface.” “Often, an increase in credit card debt is a sign that the economy is expanding — but if it occurs when inflation is still squeezing consumers’ budgets, when the cost of servicing that debt is high, and when the economic outlook is uncertain at best.” There is perhaps a more troubling explanation: an increasing number of consumers are having to use credit cards to make ends meet.

Tuesday’s report came as a number of experts warned that consumer spending was beginning to slow.

In a recent CNBC interview, Chris Watling, founder of Longview Economics, warned American consumers that they are “walking towards the abyss,” while Bank of America CEO Brian Moynihan said last month that consumers have “slowed down because of… “The interest rate environment and all the things that are happening.” “.

On the other hand, Bill Simon, former CEO of Walmart in the US, recently warned that Americans have reasons to take a step back on spending “for the first time in a long time.”

Uncertainty about how long consumer flexibility will last has left analysts divided on how the crucial holiday season will play out. Some analysts expect that the 2023 holiday period will re-energize the American consumer, while others warn that holiday sales this year will rise at their slowest pace in half a decade.

It doesn’t help that Americans have mostly spent the cash reserves they accumulated during the coronavirus lockdowns.

Data from the US Bureau of Economic Analysis show that the personal savings rate – which measures the amount of American savings from disposable income – has been steadily declining in recent months, falling to 3.4% in September. In April 2020, it reached an all-time high of 32%.

Citigroup CEO Jane Fraser told CNBC in September that “cracks” were starting to appear among some consumers as their savings dissipated. While she noted that “spending is still good,” she pointed to evidence that the double-digit growth seen in the wake of pandemic lockdowns is starting to “pay dividends.”

She said lower-income consumers were showing more “cracks” in their spending habits, but added that she was “not… worried about consumers’ health.”

Erin Othman, Managing Director of Wealth Management at the British Arbuthnot Latham Bank, said luck in an email that low-income borrowers are being hit “disproportionately higher” by higher interest rates — but that doesn’t necessarily mean the end of the world for the economy.

“Defaults, although increasing, are not at materially high levels and are likely to remain under control as long as labor markets are able to support full employment,” he said.

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