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US consumers flout recession fears with more debt, less savings


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US consumers flout recession fears with more debt, less savings

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Despite rising interest rates, Americans continue to spend at record levels.
Source: Getty Images, Prostock-Studio

American consumers appear unconcerned about economists' gloomy forecasts for a recession in 2023 as they pile on record amounts of debt and drain savings to keep spending.


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This article is part of a series exploring whether the U.S. economy will enter a recession this year and the effects of a potential downturn.

Signs of a US soft landing emerge as Federal Reserve tries to cool inflation

Markets brush off key recession warning as investors focus on the Fed

China's reopening fuels demand, adding to US inflation

With US default date looming, divided Congress risks repeat of market shocks

Fed risks more defaults if interest rates go higher for longer


U.S. retail sales blew past expectations in January, and consumer sentiment is rebounding from summertime lows. Meanwhile, household debt has grown to record levels, and savings sit well-below historical averages.

Consumer spending has yet to soften even as rising interest rates have pushed the housing market into recession and domestic manufacturing is stumbling. A day of reckoning appears to be closing in, however, as debt keeps piling up, inflation remains high and the Federal Reserve continues to raise benchmark interest rates at the most aggressive pace in its history.

"I do think the economy will slow, but we have to remember that the pandemic built up a tremendous amount of savings, equity, and cash on personal and business balance sheets," said Patrick Leary, a senior trader with Loop Capital Markets. "It is going to take a while for the increased cost of money to catch up."

Savings, debt fuel spending boom

Retail spending has exceeded economists' expectations, with advance sales jumping 3% in January from December 2022, according to the latest government data.

U.S. household debt reached $16.9 trillion in the fourth quarter of 2022, up about 8.5% year over year. Mortgages made up nearly 71% of this debt after low interest rates and bolstered savings sparked a housing boom during the pandemic.

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Credit card debt comprised less than 6% of U.S. household debt at the end of 2022 but experienced the sharpest increase, rising to an all-time high of $986 billion in the fourth quarter of 2022, an increase of $130 billion or more than 15% in a year.

"There's an old adage amongst people who cover consumer markets: Never bet against the U.S. consumer because we're always willing to spend money we don't have," said Michael Zdinak, an economist who leads the U.S. consumer markets service at S&P Global Market Intelligence.

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The rise in credit card debt during 2022 reversed the more than 20% drop from the end of 2019 through the first quarter of 2021. Pandemic-related government stimulus helped Americans unload some of their card balances.

Wrong direction

Household savings, meanwhile, have fallen compared to pre-pandemic levels. Consumers saved 4.7% of their disposable income in January, up from a 17-year low of 2.7% in June 2022 but well below the 2019 average of 8.8%. Savings climbed to 33.8% in April 2020 as spending collapsed in the early days of the pandemic.

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Broadly, U.S. household finances appear to be "moving in the wrong direction," as Americans are saving less and tapping credit more, said Shannon Seery, an economist at Wells Fargo.

"We're starting to see specific groups feel more of a financial squeeze, but from a macro perspective, the data suggest consumers have some runway left in front of them," Seery said.

Markets expect that benchmark interest rates will rise above 5% for the first time since 2007, increasing borrowing costs broadly and further slowing the economy. It will take time for that to reflect in consumer spending, Loop Capital's Leary said.

Jobs matter most

As debt rises and savings fall, however, the economic outlook from consumers has yet to crumble. This is largely due to the strength of the job market, where unemployment is at the lowest level in decades, and roughly two open jobs exist for every unemployed American.

"Having a steady stream of income and significantly fewer expenses has allowed people to buy a home, increasing mortgage demand and debt levels," said Jill Gonzalez, an analyst with WalletHub.

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Americans remain confident in their job security and income prospects, resulting in them putting more money on credit cards.

"For households, employment is always going to carry the day," Zdinak with Market Intelligence said. "People have jobs, and they have money ... everything else is a secondary concern."

Increased inflation and rising borrowing costs are among the numerous reasons that consumers historically have reined in spending, but they have not this time because the high demand for labor has boosted their purchasing power, Seery with Wells Fargo said.

How long this continues depends on how long labor demand remains robust. The latest Fed projections call for unemployment to rise to 4.6% this year from January's 3.4%, with joblessness set to remain at or near that elevated level through at least 2025.

"If the labor market deteriorates and hiring falters, I think that will be the straw that breaks the back of this consumer," Seery said.