Consumers have been propping up the U.S. economy when no one else could—now the debts are being called and they can’t pay their bills

Consumers have been propping up the U.S. economy when no one else could—now the debts are being called and they can’t pay their bills

The U.S. economy remained resilient in the aftermath of the pandemic thanks to Americans’ sheer will to spend—but debts are ticking upward, 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, marking the biggest quarterly leap in credit card debt since the records began in 1999.

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

With the third quarter of this year marking the eighth consecutive quarter of year-on-year increases in U.S. credit card balances, those minimum repayments are likely to have increased even more since the end of last year.  

Struggling to pay

Consumers are indeed struggling to meet their credit card repayments, the New York Fed’s report showed, with delinquency rates on the rise.

The CFPB’s October report noted that credit card delinquency had been rising since the COVID-19 related financial relief had been wound down, with rising prices and interest rates also playing a part.

“When real interest rates rise or the prices of goods rise faster than wages, consumers will face difficulty repaying existing balances without either cutting expenses or receiving a windfall,” the report’s authors wrote.

A growing reliance on credit cards—and difficulties paying balances back—could spell trouble for the wider U.S. economy, which has been leaning heavily on consumers over the past couple of years.

Consumer spending, coupled with a strong labor market, has helped the U.S. economy remain unexpectedly resilient, even in the face of spiraling living costs and increasingly hawkish monetary policy from the Federal Reserve.

That robustness has persevered through 2023, fueling stronger-than-expected GDP growth in September and leading the White House’s Council of Economic Advisers to label consumers a “salient force.”

However, for many high-profile market watchers, it’s become a question of when, not if, consumers will become more reluctant to splash their cash—and being sent increasingly big credit card bills every month could weigh on sentiment.

“Consumers’ debt burden and rising housing costs will constrain consumer spending,” economists at Deloitte wrote in a September update. “The rising cost of housing and consumer credit, combined with the restart of federal student loan payments, will likely continue to consume a growing proportion of households’ disposable income in the near future. And indeed, we are already seeing new delinquencies of 30 days or more rising for credit card and auto loan debt.”

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

In a recent CNBC interview, Longview Economics founder Chris Watling warned U.S. consumers were “walking toward a cliff,” while Bank of America CEO Brian Moynihan said last month that consumers were “being slowed down by the interest rate environment and all the stuff going on.”

Meanwhile, former Walmart U.S. CEO Bill Simon recently warned that Americans had reason to take their foot off of the spending pedal “for the first time in a long time.”

Uncertainty around how long consumer resilience will last has left analysts divided on how the crucial holiday season will play out. Some analysts are predicting that the 2023 festive period will reinvigorate the American consumer, while others are warning that this year’s holiday sales will rise at their slowest pace in half a decade.

It doesn’t help that Americans have mostly spent the cash reserves they built up during COVID lockdowns.

Data from the U.S. Bureau of Economic Analysis shows that the personal saving rate—which measures how much of their disposable income Americans are saving—has been steadily declining in recent months, falling to 3.4% in September. In April 2020, it hit an all-time high of 32%.

Citigroup CEO Jane Fraser told CNBC in September that “cracks” were emerging 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 aftermath of pandemic closures was starting to “come off.”

Consumers on lower incomes were showing more “cracks” in their spending habits, she said—but she added that she was “not … worried about the health of our consumers.”

Eren Osman, managing director of wealth management at British bank Arbuthnot Latham, told Fortune in an email that lower-income borrowers were being hit “disproportionately higher” by rising interest rates—but that didn’t necessarily spell doomsday for the economy.

“Defaults, whilst increasing, are not at materially elevated levels and will likely stay in check for as long as the jobs markets can support full employment,” he said.

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