Americans are piling up debt and burning through their savings – economists warn it could trigger a recession

Despite high inflation, rising interest rates and consistent recession predictions from Wall Street, Americans continued to spend at near-record levels last year, preferring to spend money on Disneyland vacations and DoorDash deliveries.

The rise in wages and the “cash buffer” of savings built up during the pandemic, when spending slowed and benefits such as stimulus checks and rising unemployment boosted incomes, said the rise in wages and the “cash buffer” of savings provided consumers with “unprecedented purchasing power,” according to Liz Young, head of investment. strategy in SoFi, internet banking. But the data shows that many Americans have begun funding their new spending habits with credit cards and draining their savings in recent months as the cost of living soars. Some experts fear that this could mean a slowdown in spending growth or even a recession.

“My intuition and common sense is that there is no bottomless savings pit to support this level of spending, and no bottomless pit of wage growth to keep wages high enough to endlessly stimulate GDP,” Young wrote in an article on Thursday. “Time will tell, but I still believe something has to give.”

U.S. consumer credit card balances jumped 7% in the fourth quarter of 2022 to a new all-time high of $986 billion, according to a New York Federal Reserve report released this week. Last year alone, consumers spent roughly 30% of the $2.7 trillion in excess savings they accumulated during the pandemic, Morgan Stanley estimates, with lower-income consumers using about 50%.

“At the pace of spending we expect, savings will decline rapidly,” investment bank economists wrote in a Jan. 24 note, arguing that consumers will spend another $500 billion of their savings on the pandemic in 2023.

Americans’ bad savings accounts and growing reliance on credit cards are likely to slow down consumer spending, which accounts for 70% of US GDP, this year. And given the deterioration in key economic indicators such as factory orders and credit conditions, some economists, such as Ataman Ozyldirim, senior director of economics at The Conference Board, a non-profit research organization, believe a recession is inevitable.

“Indicators related to the labor market, including employment and personal income, have so far remained robust. However, The Conference Board continues to expect high inflation, rising interest rates and shrinking consumer spending to push the US economy into recession in 2023,” he wrote on Friday.

Conflicting data and recession fears

Conflicting consumer health data in the US this year has thrown even the most seasoned economists into confusion.

After falling for two consecutive months, retail sales rebounded sharply in January. And researchers at the Bank of America Institute said they found “signs of an increase in consumer spending earlier this year” in a new report, noting that per-household credit and debit card spending rose 5.1% year-on-year in January.

The US economy also added 517,000 jobs last month, pushing the unemployment rate to a 53-year low of 3.4%; social security payments have risen sharply since last year; and the minimum wage has jumped in various parts of the country.

“The continued strength of the labor market in January confirms that households and the economy as a whole are still relatively resilient,” said Caylin Burch, global economist at the Economist Intelligence Unit (EIC), the research and analysis arm of the Economist Group. , said Luck.

Annual inflation, measured by the consumer price index, also eased from a June high of 9.1% to 6.4% in January, the Bureau of Labor Statistics said Tuesday. Due to the large number of available jobs and declining inflation, Goldman Sachs last week lowered its forecast for the likelihood of a recession in the US from 35% to 25%.

But recent positive economic data contradicts a number of other statistics that indicate that consumers’ ability to keep spending elevated is waning.

While inflation is declining, high prices continue to affect Americans of all income levels. More than 80% of middle-income households cut their savings or pulled money out of existing savings to make ends meet in the last three months of 2022, finance firm Primerica found in a new study. This was stated by EY-Parthenon chief economist Gregory Dako. Financial Times This week, low-income families spent all their savings for the pandemic and began to “dip” into conventional savings.

Overall, almost 65% of Americans were living paycheck to paycheck at the end of 2022, up 9.3 million from a year earlier, according to a new report from PYMNTS and LendingClub. And the personal savings rate, which measures Americans’ savings as a percentage of disposable income, fell from 9.3% in February 2020 before the pandemic to just 3.4% in December.

In addition, Ted Rossman, senior industry analyst at Bankrate, warned that Americans finance most of their spending with credit cards. Total household debt increased 2.4% in the fourth quarter to a record $16.9 trillion, driven by a 15% year-on-year increase in credit card debt, according to the New York Federal Reserve.

“High consumer spending, the highest inflation in 40 years, and sharply higher credit card rates combined to push credit card balances to a new all-time high,” he said. Luck Thursday, noting that 46% of credit card holders currently have credit card debt, up from 39% a year ago.

ECI’s Burch warned that rising interest rates and high inflation are also putting “a growing financial burden on households” and she says the trend won’t stop anytime soon.

“As interest rates rise in the coming months … this will lead to a significant slowdown in consumer spending throughout 2023,” she said.

This is not good news because consumer spending makes up 70% of US GDP, making it critical to economic growth.

Jennifer Timmerman, an investment strategy analyst at the Wells Fargo investment institute, even wrote a note this week titled “What weakening consumer spending could portend,” warning that she was already seeing spending declines and signs of “financial stress” in households that have historically indicated to decline.

“We believe pressure on inflation-adjusted wages, along with the impact of the Federal Reserve’s rate hike, will slow economic growth in the coming months. Traditional recession indicators are already signaling this,” she wrote in a note on Tuesday.

This story was originally published on Fortune.com.

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