Watch: The resilient engine of the US economy may stall

Watch: The resilient engine of the US economy may stall

Consumer spending has historically been a major driver of growth, typically accounting for more than 70% of the economy.

In the wake of the global financial crisis, American consumers spent many years shoring up household finances. Today, their balance sheets look healthy at the moment.

However, I see two main risks to consumer spending heading into the end of the year: rising credit card debt and delinquencies and the resumption of student loan repayments.

However, consumer debt appears manageable.

Despite headlines about rising debt levels, US household assets have also risen. Total assets and liquid assets as a share of liabilities are at their highest levels in several decades.

Unlike the 2000s, when consumers borrowed heavily and financed much of their consumption through debt, today’s consumers do not need to reduce debt.

Checking account balances also remain well above pre-pandemic levels, providing a useful buffer.

Debt servicing costs remain low compared to history as well, even as interest rates rise.

Mortgage debt represents a large proportion of total household debt, and many borrowers have been able to maintain low mortgage interest rates in recent years.

This has insulated a large portion of debt from high interest rates.

I expect private consumer spending to remain on a steady upward trajectory.

However, I see the recent deterioration in debt quality as a cause for some concern.

For example, delinquencies on credit card and auto loans have risen recently, especially among younger borrowers.

While overall delinquencies are still below pre-pandemic levels, the acceleration could be a sign that consumers are starting to feel the pressure from rising interest rates as well as pressure on disposable income due to rising inflation.

The recent rise in consumer bankruptcy filings could also reflect stress.

Meanwhile, credit conditions for consumer loans have tightened significantly in the past year, meaning consumers are unable to finance large purchases with soft loans.

Banks have tightened credit conditions across the board as a result of higher financing costs and increased capital needs in the wake of the March 2023 regional banking crisis.

According to the Federal Reserve’s Senior Loan Officers Survey of Bank Lending Practices, the percentage of banks less willing to lend to consumers has risen to historic levels.

Another significant headwind is the U.S. Supreme Court’s recent ruling requiring student loan debt repayment for millions of borrowers to begin in October.

This is likely to represent a modest drag on spending at the end of this year and early 2024.

I expect student loan payments to have a greater impact on younger borrowers, who are already experiencing higher delinquencies on credit cards and auto loans.

Finally, the excess savings that consumers accumulated during the height of the pandemic has dwindled.

There is some debate about exactly when the excess savings will be fully exhausted, but most analyzes suggest that this reserve will be exhausted by the end of 2023.

Without a savings buffer to cushion shocks from rising prices and interest rates or the resumption of student loan payments, American consumers could come under increasing pressure.

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