Falling savings and rising debt leave consumers financially precarious
WASHINGTON. American households are cutting back on savings and taking on increasing amounts of debt, leaving many of them in a weaker position to weather an economic downturn made even more likely by the recent banking turmoil.
Economic slowdown fears were renewed this week as US regulators took control of Silicon Valley Bank, Swiss officials stepped in to bolster Credit Suisse’s finances, and a group of Wall Street firms threw a lifeline at First Republic Bank.
The events have drawn parallels with the 2008 financial crisis and are likely to force banks to tighten lending, which will put additional pressure on already stressed consumers, which in turn could force them to cut costs and cause layoffs in companies facing declining sales.
“What we are seeing right now, in terms of stress in the banking sector, is likely to have escalating implications for the deterioration in household finances,” said Gregory Dako, chief economist at EY-Parthenon. “We are likely to see an environment in which banks are more cautious in their lending, especially smaller regional banks, and this will further exacerbate the easing we have already seen.”
Goldman Sachs on Thursday raised its chances of a recession by 10 percentage points to 35%. Other economists are even less optimistic that the US will avoid a recession, with Bloomberg polls putting a 60% chance of a recession.
For much of the past year, with inflation at its highest level in decades, consumers have largely been able to keep increasing their spending. Although retail sales were slightly down in February compared to January, they were still up 5.4% year-over-year, the Commerce Department said this week.
Bank of America credit and debit card data for February showed household spending rose 2.7% year-on-year, “suggesting consumer spending remains resilient even as spending growth slows,” according to the report. last week from the Bank of America Institute.
But the data show that wages have not kept pace with inflation over this period. As a result, Americans are increasingly turning to their credit cards and savings accounts to support their spending habits.
“The average person’s finances were probably better a year or two ago than they are now, just because they had more money and less debt,” said Ted Rossman, senior industry analyst at Bankrate.com. “At the start of 21, there was a time when credit card balances were 17% lower than before the pandemic. And now they are up 28% from that low.”
Americans have spent about half of the savings they accumulated during the pandemic, rising from about $2.1 trillion in excess savings through an influx of government stimulus checks and spending cuts during lockdowns to about $900 billion as of the third quarter of last year. JP Morgan report.
At the same time, according to data from the Federal Reserve Bank of St. Louis, the percentage of people’s wages going into savings has fallen to about half of what it was before the pandemic.
Meanwhile, the amount of Americans’ debt has risen sharply. Credit card balances increased by $61 billion to a record high of $986 billion in the last quarter of 2022, a dramatic change from two years earlier when Americans paid off debt with stimulus checks, according to New York Federal Reserve data. . Auto loan balances rose by $94 billion.
There are signs that a growing number of consumers are finding it harder to pay off this debt.
According to Bankrate, the percentage of credit card holders in debt month on month increased to 46% from 39% a year ago. Auto loan arrears are steadily rising from pandemic lows, with the proportion of auto loans overdue by at least 60 days reaching its highest level since 2006, according to a Cox Automotive report last month.
All of these factors have investors, economists, and corporate executives keeping a close eye on what steps the Federal Reserve will take on interest rates next week. Another round of rate hikes will make it more costly for consumers to borrow money to finance a home or car, or to balance their credit cards. It will also put pressure on businesses that want to borrow money.
But with inflation stubbornly high – it rose 6% year-over-year in February – some economists say the Federal Reserve has no choice but to keep raising rates to cut spending.
Another key factor that economists say they are watching is the labor market, which remains strong in part because consumers continue to spend.
Job creation slowed in February but was still stronger than expected, with the economy adding 311,000 jobs, the Labor Department said last week. The unemployment rate rose to 3.6%, which is the same as last year. But even a small spike in unemployment could force millions of Americans to cut back on their spending.
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