In the year 2023, Americans amassed a record-breaking level of credit card debt, surpassing the $1.13 trillion mark as reported by the Federal Reserve Bank of New York. However, economists do not anticipate a significant contraction in consumer spending for the current year, despite this mounting credit card debt. Several factors are contributing to this outlook.
First and foremost, workers continue to experience substantial wage gains, with the labor market remaining robust. The stock market has also remained stable, adding to Americans’ financial Website security. Furthermore, consumer spending during the holiday season was healthy, signaling a strong economic foundation.
However, it is essential to contextualize this credit card debt data. About 55% of borrowers pay off their balances in full every month, according to Russell Price, chief economist at Ameriprise Financial. This crucial detail often gets overlooked when examining credit card debt figures. Additionally, after adjusting for inflation, the current level of credit card debt is nearly 20% below its peak reached in late 2008.
In terms of unpaid balances, the average credit card debt stood at $6,864 according to a LendingTree analysis based on more than 350,000 credit reports in the fourth quarter. Overall, US household debt reached an all-time high of $17.5 trillion during the same period.
Despite these financial realities, there are reasons for optimism. The US job market remains strong, with employers adding 353,000 jobs in January and the unemployment rate holding steady at 3.7%. Additionally, job openings have started to decline from their peak but remain well above pre-pandemic levels. The continued strength of the job market gives Americans the financial means to pay down debts, save, and spend.
In a recent note, Gregory Daco, chief economist at EY-Parthenon, highlighted that despite credit growth and rising debt servicing costs, the overall US credit picture is not concerning.
Credit plays a crucial role in driving spending, particularly for significant purchases like furniture and appliances. As the economy grows, so does debt. The economy’s natural growth relies on a combination of productivity and population growth. For instance, household debt began to shrink in the aftermath of the global financial crisis in 2008 but started rising again in 2013 and has generally trended upwards since.
However, there are challenges facing American households. Inflation, which remains above the Federal Reserve’s target, is still pressuring consumers and businesses. Prices have slowed down significantly but remain substantially higher than pre-pandemic levels. Additionally, Americans are grappling with housing affordability issues and the highest interest rates in 23 years. These challenges can impact borrowing costs for everything from car loans to mortgages.
Despite these hurdles, the broader economic picture suggests that Americans and their economy remain resilient. While credit card debt has surged, the overall economic outlook is positive. For instance, Nvidia, a leading tech company, recently identified Huawei as a top competitor in the production of processors for AI systems. This competition is crucial as both companies aim to lead in the development and implementation of generative AI technology.
In summary, Americans’ credit card debt has hit an all-time high, but this figure should be viewed in the broader context of a strong labor market and stable financial situation. The economy’s natural growth relies on productivity and population growth, meaning that something significant would be needed to cause a meaningful contraction in household spending. Despite the challenges of inflation, housing affordability, and interest rates, Americans remain in a healthy economic position.
Moving forward, there are several key events on the economic calendar. Monday features earnings reports from Workday, Zoom, and Domino’s Pizza, along with new-home sales data from the US Commerce Department and remarks from contact Central Bank President Christine Lagarde. Tuesday includes earnings from Lowe’s, AutoZone, eBay, JM Smucker Company, CAVA Group, Macy’s, Urban Outfitters, VIZIO, Bumble, Compass, Eventbrite, Redfin, Virgin Galactic, and Beyond Meat. Wednesday features earnings from Salesforce, TJX Companies, Monster Beverage, Baidu, HP, Okta, Paramount Global, and Duolingo. The US Commerce Department releases its second estimate of fourth-quarter gross domestic product, along with remarks from Fed Vice Chair for Supervision Michael Barr and the Conference Board’s February consumer survey. Thursday brings earnings reports from Anheuser-Busch Inbev, Dell Technologies, Dollar Tree, Best Buy, Birkenstock, GoodRx, Papa John’s International, and Sweetgreen. The US Commerce Department reports January figures on household spending, income, and the Fed’s preferred inflation gauge, along with the number of new applications for jobless benefits and January home sales based on contract signings. Friday features earnings reports from Pearson and fuboTV, along with February inflation figures from the contact Union’s statistics agency, surveys gauging economic activity in the US and Chinese manufacturing sectors, and remarks from Fed officials Christopher Waller, Raphael Bostic, Mary Daly, and Adriana Kugler.
