Shrinking Savings and Rising Debt: US Consumers Face Uncertain Financial Future

Bullion Bite
Shrinking Savings and Rising Debt: US Consumers Face Uncertain Financial Future

Recent turmoil in the banking industry has renewed fears of a slowing economy and placed many American households in a precarious financial position. A significant number of consumers have been whittling down their savings and taking on increasing amounts of debt, leaving them vulnerable to an economic downturn. The events of the past week, which included the takeover of Silicon Valley Bank, the bailout of Credit Suisse, and the lifeline thrown to First Republic Bank, have drawn parallels to the 2008 financial crisis. Banks are likely to tighten up their lending, putting added pressure on already-strained consumers, potentially leading to layoffs at companies facing declining sales.

Consumers have largely been able to increase their spending, despite inflation hitting its highest levels in decades. Retail sales declined slightly in February compared to January, but they were still up 5.4% from a year earlier. However, wages have not kept up with inflation, leading Americans to turn to their credit cards and savings accounts to maintain their spending habits. Credit card balances increased by $61 billion to a record high of $986 billion in the last quarter of 2022, while auto loan balances rose by $94 billion. The percentage of credit card holders carrying debt from month to month has also increased, and auto loan delinquencies have been rising.

Americans have spent down about half of the savings they accumulated during the pandemic, going from about $2.1 trillion in excess savings from the influx of government stimulus checks and reduced spending during lockdowns to around $900 billion as of the third quarter last year. The percentage of people’s paycheck going into savings has fallen to about half of what it was prior to the pandemic, according to data from the Federal Reserve Bank of St. Louis.

The Federal Reserve's moves on interest rates next week will be closely watched by investors, economists, and corporate executives. Another round of rate increases would make it costlier for consumers to borrow money to finance a home or buy a car or to carry a balance on their credit cards, putting pressure on businesses looking to borrow money. But with inflation persistently high, some economists say the Federal Reserve has no choice but to continue hiking rates to tamp down spending. Another key factor economists are watching is the job market, which has remained strong in part because consumers have kept up their spending.

"The backbone of consumer spending activity is the labor market," said Gregory Daco, chief economist at EY-Parthenon. "If the labor market shows significant signs of cooling, moderation, or weakening, it will directly affect household incomes and consequently their ability and desire to spend."

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