Figures from the Federal Reserve are expected to show that U.S. consumer borrowing continued to increase in August, driven by rising interest rates and steady spending. However, this upward trend may eventually impact economic growth.
Growth in Consumer Credit
According to economists surveyed by FactSet, the latest data from the Federal Reserve is predicted to reveal a growth of $11.3 billion in outstanding U.S. consumer credit for August. This follows a gain of $10.4 billion recorded in July.
Potential Consequences of Increasing Debt
Given that consumer spending plays a crucial role in driving the U.S. economy, there is a concern that continued accumulation of debt by Americans could lead to a slowdown in growth. This concern is heightened by the fact that inflation remains above the Federal Reserve’s 2% target and that interest rates have risen due to multiple rate hikes by the central bank since early 2022.
The Stability of Consumer Finances
Despite the rising levels of debt, most consumers have managed to stay financially stable thus far. Even though total credit card debt reached a record high of $1.03 trillion in the second quarter, overall delinquency rates have remained relatively flat. Additionally, credit-utilization ratios, which compare consumers’ borrowing to the amount of money offered by lenders, have not experienced significant increases.
Factors Contributing to Financial Stability
The relative health of consumers’ finances, despite the mounting debt, can largely be attributed to the robust job market. Typically, individuals struggle the most with debt repayment when they lose their jobs. Therefore, as long as unemployment remains low and job opportunities are abundant, borrowers can generally continue making regular payments on their loans and credit cards, even while depleting their savings set aside during the pandemic.
Increased Job Growth and its Impact
Recent Bureau of Labor Statistics figures indicate that the U.S. economy added an unexpectedly high number of new jobs in September, totaling 336,000. Furthermore, the agency revised its figures for job gains in July and August to show an additional 119,000 positions were added during those months.
The acceleration of hiring over the summer helps explain the surge in consumer spending and overall economic growth experienced by the U.S., according to KPMG Chief Economist Diane Swonk.
For further insights, refer to the following resources:
- Federal Reserve Data
- Bureau of Labor Statistics Figures
Concerns on Wage Growth and Consumer Outlook
Recent data from the Bureau of Labor Statistics (BLS) reveals a concerning trend in the US economy. While payrolls have been growing at a faster rate, the gains in wages have been slowing down. In September, the year-over-year gains in average hourly earnings slipped to 4.2% from 4.3% in August. However, on a three-month annualized basis, hourly pay is still growing at a 3.4% rate, indicating a return to pre-pandemic levels seen in 2019. This is an important observation made by Nick Bunker, head of economic research at the Indeed Hiring Lab.
The combination of slower wage growth and rising interest rates poses challenges for consumers. According to Lendingclub’s Reality Check: Paycheck-To-Paycheck research series, approximately 60% of Americans reported living paycheck to paycheck as of August. This trend is not limited to a specific income bracket; it cuts across all levels. A significant portion of low-, middle-, and high-income households do not have any money left over at the end of the month, and nearly one in five Americans face difficulties in paying their bills.
While the labor market has remained resilient thus far, it is expected to gradually return to pre-pandemic norms even if the Federal Reserve successfully tackles inflation without triggering a recession. Although the unemployment rate held steady at 3.8% in September, economists believe that rates above 4% are more realistic in the long term.
If unemployment were to rise from its current level to 4.4%, economists estimate that over a million Americans could lose their jobs. Coupled with the recent surge in longer-dated bond yields and the subsequent increase in interest payments on credit card debt, such financial stress could push the economy into a period where consumers struggle to meet their obligations, potentially leading to defaults.
This scenario would have widespread implications for various sectors, including banks, retailers, restaurants, travel, and more.