Main Topic: Americans' credit card debt reaches over $1 trillion for the first time ever.
Key Points:
1. Total credit card indebtedness rose by $45 billion in the April-through-June period, reaching $1.03 trillion.
2. Credit card delinquency rates have increased, with 30 or more days late climbing to 7.2% in Q2.
3. The rise in credit card balances reflects inflationary pressures and higher levels of consumption, while household income remains below pre-pandemic levels.
### Summary
📉 Americans could run out of savings as early as this quarter, according to a Fed study. Excess savings are likely to be depleted during the third quarter of 2023.
### Facts
- 💸 As of June, US households held less than $190 billion of aggregate excess savings.
- 💰 Excess savings refer to the difference between actual savings and the pre-recession trend.
- 🔎 San Francisco Fed researchers Hamza Abdelrahman and Luiz Oliveira estimate that these excess savings will be exhausted by the end of the third quarter of 2023.
- 💳 Americans are using their credit cards more, accumulating nearly $1 trillion of debt.
- 📉 The downbeat forecast raises concerns about the US economy as consumer spending is crucial for growth.
The majority of Americans are unable to pay off their credit card debt in full each month, with 51% of individuals rolling over their balances and accruing interest, according to a survey by J.D. Power. This marks a significant shift from previous years and is attributed to factors such as inflation, dwindling savings, rising interest rates, and increased everyday use of credit cards.
This podcast episode examines the worth of a college degree and the impact of student debt payments on the US economy as America's pandemic-era moratorium on student debt payments comes to an end in September.
Despite reaching record levels of total credit card debt and household debt, Americans are actually managing their debt better than in the past due to inflation masking the impact on balances and lower debt-to-deposit levels, according to an analysis by WalletHub. However, the rising trajectory of credit card debt and the increasing number of households carrying balances raise concerns, especially considering the high interest rates, which can take more than 17 years to pay off and cost thousands of dollars in interest. Meanwhile, savers have the opportunity to earn higher returns on cash due to higher inflation and interest rates.
Consumer debt, including auto-loans and credit card balances, is increasing in the United States, but strong government intervention and temporary relief measures have created a cushion of extra cash savings, leading to a positive outcome for Bitcoin (BTC) according to Cointelegraph analyst Marcel Pechman.
The US economy is expected to slow in the coming months due to the Federal Reserve's efforts to combat inflation, which could lead to softer consumer spending and a decrease in stock market returns. Additionally, the resumption of student loan payments in October and the American consumer's credit card addiction pose further uncertainties for the economy. Meanwhile, Germany's economy is facing a contraction and a prolonged recession, which is a stark contrast to its past economic outperformance.
The impending resumption of student loan payments after a three-year pause due to the pandemic is causing financial strain for borrowers, potentially leading to defaults and economic repercussions, despite some borrowers using the pause to pay down debt and improve their financial situation.
The second quarter of 2023 saw a consistent rise in borrowing among Canadians, with subprime borrowers experiencing the highest increase in credit balances due to higher spending habits and elevated interest rates on variable-rate loans. Demand for new credit also grew significantly, leading to a total Canadian household debt of $2.3 trillion.
Millions of Americans may have to prioritize their student loan payments over their retirement savings, as the resumption of student debt repayments poses a challenge for workers already struggling to save for retirement due to inflation and market volatility.
More Americans are struggling to keep up with car loan and credit card payments, particularly lower-income earners, as higher prices and rising borrowing costs put pressure on household budgets, signaling potential consumer stress; the situation is expected to worsen as interest rates continue to rise and paused student loan payments resume.
Gross domestic product (GDP) grew at a rate of 2.1% in the second quarter of 2023, driven by consumer spending, while the Federal Reserve is considering raising interest rates again despite a drop in GDP growth; Americans are increasingly turning to credit cards in a high-interest rate environment, leading to rising credit card debt.
Struggling U.S. families relying on credit card loans to cover living expenses may face a spending correction soon, as consumers continue to spend despite rising rates and living costs, leading to potential unsustainable debt levels and limited access to credit.
U.S. consumer spending increased in July, boosting the economy and reducing recession risks, but the pace is likely unsustainable as households dip into their savings and face potential challenges from student debt repayments and higher borrowing costs.
Despite economists' expectations, many student loan borrowers have already resumed making payments before the October deadline, potentially leading to a decline in consumer spending and affecting the economy as households adjust their budgets.
The U.S.'s national debt has reached nearly $33 trillion and while debt has its uses, concerns are rising about its impact on the economy, particularly as the debt-to-GDP ratio nears 100%.
Consumer spending has remained resilient, preventing the US economy from entering a recession, and this trend will likely continue due to low household debt-to-income levels.
Consumer spending in the US is expected to decline in early 2024, marking the first quarterly decline since the start of the pandemic, according to a survey by Bloomberg. The pessimism is attributed to high borrowing costs and the depletion of COVID-era savings.
Despite increased household wealth in the US, millions of households are struggling financially due to inflation, high interest rates, and rising living costs, which have led to record levels of debt and limited access to credit.
Consumer spending in the US has supported the economy despite concerns of a recession, but rising interest rates, the resumption of student loan payments, and dwindling savings are predicted to put pressure on consumers and potentially lead to a shrinking of personal consumption.
Borrowers with federal student debt can use their remaining funds in a 529 college savings plan to pay off up to $10,000 of their debt, providing a potentially appealing option as student loan bills are set to resume in October.
The resumption of student loan payments in October could have a substantial impact on consumer spending and the economy, potentially subtracting 0.8 percentage points from consumer spending growth in the fourth quarter and putting pressure on retailers during the crucial holiday shopping season; however, the full extent of the impact remains uncertain due to factors such as income-based repayment programs, the one-year grace period for missed payments, and the potential for borrowers to prioritize other expenses over loan repayments.
Women, who hold two-thirds of the $1.7 trillion federal student loan debt in the US, face a greater struggle with loan repayment due to lower earnings and the gender pay gap, which will become more evident as borrowers resume loan repayments after a pandemic pause, exacerbating their financial burden.
The Federal Reserve's restrictive monetary policy, along with declining consumer savings, tightening lending standards, and increasing loan delinquencies, indicate that the economy is transitioning toward a recession, with the effectiveness of monetary policy being felt with a lag time of 11-12 months. Additionally, the end of the student debt repayment moratorium and a potential government shutdown may further negatively impact the economy. Despite this, the Fed continues to push a "higher for longer" theme regarding interest rates, despite inflation already being defeated.
The Federal Reserve is expected to hold off on raising interest rates, but consumers are still feeling the impact of previous hikes, with credit card rates topping 20%, mortgage rates above 7%, and auto loan rates exceeding 7%.
More than a third of American parents anticipate accumulating credit card debt to cover back-to-school expenses, and inflation is impacting their ability to pay for their children's education, supplies, and extracurricular activities, according to a survey by ScoreSense. Additionally, homeschooling parents are being significantly affected by inflation, with 75% reporting that it hampers their ability to fund their kids' education and extracurriculars. Back-to-school spending is expected to reach a record high of $41.5 billion in 2023, with electronics being a major driver of the increase.
A drop in savings among Americans and record credit-card debt could have disastrous consequences for the economy if a recession occurs, as data shows personal savings rates remain historically low and many Americans have less than $5,000 in savings.
US credit card debt reached $1 trillion for the first time, but experts argue that it is not a cause for concern as factors like income, wealth, spending growth, credit card utilization, and delinquency rates indicate that consumers are in good financial shape unless the US enters a severe recession.
As federal student loan payments are set to resume, surveys indicate that the majority of borrowers plan to cut back on spending and will have difficulty saving for retirement, potentially leading to a drop in consumer spending and impacting economic growth. Some borrowers are already struggling with increased stress and debt from additional financial obligations taken on during the payment pause, while higher-earning households also anticipate difficulties in making payments. While there are options available, such as income-based repayment plans or a one-year grace period, the overall financial strain is expected to have significant repercussions.
The current state of the consumer is concerning as wages are not keeping up with inflation, excess savings from the pandemic have been depleted, and increasing levels of credit card debt are making it difficult to maintain spending levels, leading to potential economic headwinds.
The resumption of student loan repayments will lead to a significant decrease in consumer spending, causing a contraction in real consumer spending growth and an increase in student loan delinquency rates, according to Fitch Ratings.
American household debt has reached record levels in the second quarter of 2023, as Americans have taken on more debt amidst diminishing savings and high interest rates.
The US consumer is showing signs of strain due to rising gas prices, high credit card delinquency rates, and the impending restart of student loan payments, leading to concerns about weaker consumer spending and potential credit trouble for heavily indebted companies.
Rising interest rates, rather than inflation, are now a major concern for the US economy, as the bond market indicates that rates may stay high for an extended period of time, potentially posing significant challenges for the sustainability of government debt.
Student loan repayments, which have resumed after a three-year pause, may not cause a recession in the US economy as the debt is concentrated among a small number of households, but it will likely impact consumer spending and potentially slow down economic growth.
Amid economic uncertainty, Americans are saving less, but continuing to spend, which may help the economy avoid a recession; however, many are struggling financially and have little to no savings, relying on credit card debt to make ends meet, and experts recommend building a larger emergency fund to navigate through potential economic contractions.
The cost of servicing the US debt is expected to reach a new record by 2025, as higher interest rates increase borrowing costs and push interest payments on the debt to $10.6 trillion over the next decade.
Despite efforts by Federal Reserve Chair Jerome Powell to curb borrowing and spending habits, many American companies, both investment-grade and sub-investment grade, have continued to borrow more money, potentially indicating that interest rates may need to be raised even higher to effectively break the cycle. Increased borrowing has raised concerns about the financial health and stability of businesses, with indicators of companies' ability to make payments deteriorating. The borrowing spree is primarily a North American phenomenon, as European and Asian companies have added far less debt or decreased their borrowing.
Consumer spending in the US has been strong, driven by a "YOLO economy," but with looming concerns over a recession, financial advisors recommend reassessing budgets, prioritizing spending, paying down credit card debt, and thinking long-term to achieve financial stability.
The resumption of federal student loan repayments after a pause due to the pandemic could have a significant impact on the US economy, with consumer spending potentially being affected as borrowers face increased financial obligations.
Lawmakers and regulators are pushing for interest rate caps and lower fees on credit cards as total credit card debt surpasses $1 trillion and the average interest rate reaches a record high of over 21%; however, it remains unclear if these measures will be successful due to lack of support and opposition from the financial services industry.
