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Despite the economic challenges posed by the COVID-19 pandemic, the U.S. economy displayed remarkable resilience, driven in large part by consumers’ willingness to spend. However, this prolonged spending spree is taking its toll as debts are mounting, and an increasing number of individuals are struggling to meet their financial obligations.
A recent report released by the Federal Reserve Bank of New York has raised concerns. It reveals that Americans now collectively owe a staggering $1.08 trillion on their credit cards, marking the highest amount ever recorded. The report discloses that in the three months leading up to the end of September, credit card balances surged by 4.7%, equating to an increase of $48 billion. This marks the most significant quarterly surge in credit card debt since records began in 1999.
An additional report published in October by the Consumer Financial Protection Bureau (CFPB) disclosed that credit card companies charged consumers an unprecedented total of $130 billion in interest and fees in 2022. Furthermore, the CFPB noted that the average minimum payment due on credit card bills escalated to $100 per month last year.
The relentless rise in credit card balances is placing considerable pressure on consumers, with delinquency rates on the upswing, as highlighted in the New York Fed’s report. The CFPB’s report further emphasized that credit card delinquencies had been increasing as financial relief associated with COVID-19 wound down, alongside the impact of rising prices and interest rates.
This growing reliance on credit cards, coupled with mounting difficulties in repaying balances, raises concerns about the broader U.S. economy, which has leaned heavily on consumers over the past couple of years. Consumer spending, combined with a robust labor market, has played a pivotal role in the economy’s unexpected resilience, even in the face of soaring living costs and a progressively hawkish monetary policy from the Federal Reserve.
This resilience was evidenced by stronger-than-expected GDP growth in September, earning consumers the label of a “salient force” by the White House’s Council of Economic Advisers. Nevertheless, many prominent market observers are raising concerns about the sustainability of this consumer-driven strength, particularly as consumers are increasingly confronted with substantial monthly credit card bills.
While some experts acknowledge that the current situation is not akin to the pre-2008 financial crisis era in terms of the percentage of debt relative to disposable income, there is growing unease that an increasing number of consumers are resorting to credit cards to make ends meet. Notably, recent reports indicate a slowdown in consumer spending, which has triggered debates on the prospects for the critical holiday season.
The declining personal saving rate, which measures the portion of disposable income saved by Americans, is another factor contributing to these concerns. It has steadily fallen in recent months, dropping to 3.4% in September, compared to the all-time high of 32% recorded in April 2020.
While concerns about consumers with lower incomes showing signs of financial stress have emerged, analysts remain divided on the outlook for the holiday season. Some foresee a resurgence in consumer spending during the 2023 holiday period, while others caution that this year’s holiday sales could witness their slowest growth in five years. Moreover, the depletion of savings built up during the pandemic lockdowns adds to the uncertainties surrounding consumer spending.
In sum, the financial strain imposed by credit card debt, compounded by rising interest rates and inflation, raises questions about the future trajectory of consumer resilience and its impact on the broader U.S. economy. Although default rates have increased, they are currently not at significantly elevated levels and may remain in check as long as the job market can support full employment.
