Recent data has shown a concerning trend in Americans' spending habits, prompting worries among economic observers. While consumer debt levels are not alarmingly high, the Federal Reserve is keeping a close eye on the increasing rate of consumer delinquencies, particularly in areas such as auto loans, credit card bills, and rent payments.
During the fourth quarter of 2023, credit card debt surged by $143 billion compared to the previous year, according to the New York Fed. The transition of credit cards and auto loans into delinquency has surpassed pre-pandemic levels, with delinquency rates rising across all debt types except for student loans.
Experts suggest that the rise in credit card debt and delinquencies may indicate that consumers, especially those with lower incomes, are depleting their savings and resorting to credit to sustain their spending habits. Despite the Federal Reserve's aggressive interest rate hikes, the strong economy, robust job market, and growing household income have supported consumer spending, making a significant pullback in spending less likely this year.
However, lower-income Americans have felt the impact of inflation and high interest rates more acutely, leading them to cut back on spending, seek bargains, and cook at home to manage their budgets. The Fed closely monitors consumers' ability to meet their financial obligations, as a substantial decline in spending could have adverse effects on the economy, potentially complicating future interest rate decisions.
Corporate earnings reports have reflected a mixed outlook on American consumers, showing resilience but also a trend towards more cautious spending. While consumer spending is expected to moderate, it remains a critical driver of the US economy, accounting for about two-thirds of GDP.
The upcoming release of the first-quarter GDP estimate by the Commerce Department will provide further insights into the health of the consumer sector. The Atlanta Fed projects a 2.7% growth rate for the first three months of 2024, indicating a slightly slower but still solid pace of economic expansion.
