Key takeaways

  • Consumer spending, a key driver of the U.S. economy, remains at a level that has helped prevent a recession.

  • However, the total amount of household debt accumulated by Americans reached record levels last year.

  • Nevertheless, consumers still appear to be on solid ground financially – for now.

Consumer spending is one of the most important elements of the U.S. economy. In the 4th quarter of 2022, personal consumption expenditures represented nearly 68% of the nation’s Gross Domestic Product.1 The reality for most Americans is that some of that spending, particularly for bigger ticket items like homes, automobiles and higher education, requires borrowing. In addition, many consumers take on debt when they use credit cards for day-to-day purchases but may not pay off the total bill each month.

The role consumers play in driving economic activity, and their contribution to a growing economy, is one reason why investors pay close attention to the state of consumer debt. At the end of 2022, total household debt in the U.S. reached a record high, totaling $16.9 trillion. This represents an 8.3% increase over the amount of debt held at the end of 2021.2

The upward trend in consumer debt contrasts flatter growth in debt levels in 2020 and 2021. Household savings rates, defined as the proportion of current income unspent, moved higher dating back to the start of the COVID-19 pandemic in early 2020. Americans benefited from fiscal stimulus measures including student loan payment holidays and direct government payments to individuals, such as payments from the American Rescue Plan Act of 2021. At the same time, widespread business shutdowns limited consumer spending opportunities.

As the economy reopened and more spending opportunities emerged (restaurants reopening, travel again being an option), many Americans spent a larger proportion of their income, dipped into accumulated savings and increasingly relied on credit to cover expenses. As a result, savings rates have declined in recent months. It raises concerns that if consumers take on too much debt, they’ll need to cut back on spending at some point. Could increasing debt levels have economic or investment ramifications?


Putting “record household debt” into perspective

Consumers started 2022 in a strong financial position, according to Rob Haworth, senior investment strategy director at U.S. Bank. “Consumer debt was low, savings were high and people were earning pay raises.” But Haworth says by the end of 2022, the environment changed. “We saw a meaningful rise in the amount of consumer borrowing, mostly in the form of unsecured revolving credit, like credit cards.” For example, total household credit card debt rose 15.1% over the course of 2022.2

Chart depicts increasing household debt in 2022 across a range of categories including student loans, auto loans, home mortgages, credit cards and other categories.

Source: Federal Reserve Bank of New York, Center for Microeconomic Data, “Household Debt and Credit Report, 4th Quarter 2022.”
* Includes retail cards and other consumer loans.

The upward trend in consumer debt in 2022 contrasted with the two years leading up to that. “Household debt burdens declined during the pandemic,” says Matt Schoeppner, senior economist at U.S. Bank. “Consumers paid off credit card debt and other high interest loans.” However, Schoeppner notes that the economic environment began to change, with a resurgence of high inflation being the most marked difference from the pre-pandemic era and the early days of the pandemic. “As inflation became a burden and government payments ended, consumers were willing to take on more debt.”

“If people are borrowing more money, the question is whether they are in a position to pay it back.”

Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management

While the raw data about rising amounts of household debt can be concerning, Haworth notes that some perspective is required. “If people are borrowing more money, the question is whether they are in a position to pay it back,” says Haworth. “When we compare current household debt levels to disposable personal income, we don’t see reason for significant concern at this point.” Haworth says expanded consumer borrowing is not yet exceeding the capacity of households to manage the debt. As shown in the chart below, through the third quarter of 2022, household debt service payments represented, on average, less than 10% of disposable personal income. While higher than the recent low point of 8.3% in early 2021, it is far below recent peak levels that exceeded 13% in 2007 and 2008.3

Source: Board of Governors of the Federal Reserve System (US).


Consumers keep the economy on track

Consumers’ willingness to maintain spending levels even though economic growth slowed in 2022 proved to be important at a time when many anticipated the potential onset of a recession. With the Federal Reserve tightening monetary policy (raising short term interest rates, reducing its balance sheet of Treasury and mortgage-backed securities), the stage was set for a possible recession. To this point, consumers have played a major role in keeping one from occurring.

“The willingness of consumers to take on debt provided a bridge of support during this period of economic uncertainty,” says Schoeppner. “Taking on more credit is ultimately a game of faith. It signals that lenders have enough confidence in the economy that they believe consumers will remain in a strong position to make timely repayments.”

Consumers have likely been buoyed by the strong jobs market. The nation’s unemployment rate is at historically low levels, new job growth has been solid, and wages have risen at a faster rate than in recent times. However, income growth slowed in recent months, a factor that bears watching, according to Haworth. “Consumers will have a difficult time accelerating savings without more income growth, but nevertheless, they can’t be considered, in aggregate, overextended on credit at this point.”

Haworth also believes that most recent indicators point to a continuation of favorable job market trends. “Small businesses appear to still be looking to hire. You would think if they anticipated an economic slowdown, that wouldn’t be the case.”


Manageable consumer debt levels

Haworth notes that consumer attitudes toward debt have changed significantly since the financial crisis of 2007-2009. At that time, consumer debt levels reached new highs, with some households maintaining multiple mortgages and building up balances on more than one credit card. “Consumers are more cautious about debt today,” says Haworth. “They’re looking to spend but are being more vigilant to avoid going overboard.”

Schoeppner agrees that the rising consumer debt levels do not yet set off any economic warning signals. “Non-mortgage debt is back to pre-pandemic levels relative to income, but not yet anything of concern. Mortgage debt is still reasonable by recent standards, even with the spike in mortgage rates.”

The jobs market is likely to dictate consumer spending habits. “Initial jobless claims on a week-to-week basis are near historic lows,” notes Schoeppner. “Until you see that number start to edge higher, it’s hard to see consumers losing faith in their job security.” Schoeppner says if current trends persist, consumer spending can continue at a favorable pace, helping to keep the economy out of recession.

Does the willingness of consumers to continue spending work against the Federal Reserve’s effort to rein in inflation? “The Fed is trying to find a level of borrowing costs that is sufficiently restrictive to slow things down enough to bring inflation back down to its target level of approximately 2%,” says Schoeppner. Yet he thinks the Fed is close to finished raising the short-term interest rate it controls, the federal funds rate. “While consumers are unlikely to see mortgage rates or credit card rates come down anytime soon, those rates aren’t likely to rise much from this point, either.”


Keeping an eye on debt

Consumer debt trends will bear scrutiny in the months to come. Based on current data, consumers don’t appear to be spending beyond their means. Could that change in the future? Haworth is watching two key indicators:

  1. The volume of revolving credit relative to disposable personal income. As noted above, that figure remains relatively low based on the most recent data. “If it starts to rise, it could trigger more concerns about the potential that consumers will ultimately need to pull back on spending,” says Haworth. That could contribute to recession fears.
  2. The state of the job market. “If there are signs of weakening, that could indicate consumers will be forced to rein in spending or carry considerably more credit to maintain current spending levels,” says Haworth.

Schoeppner adds that sentiment about the direction of the economy could be a major consideration. “If consumers, businesses and financial institutions all begin to lose faith about the direction of the economy at the same time, that could tighten credit availability, which would have negative economic ramifications.” Schoeppner emphasizes that this environment does not exist today, primarily because of the labor market’s continuing strength.

The key issue will be whether consumer spending slows, which could have ramifications for the broader economy, potentially creating a greater risk of recession. Investors will want to keep an eye on how consumer activity, including the need to take on more credit, might impact the economy moving forward.

It’s important to consider the current economic outlook as you evaluate your own portfolio of investments. Talk to your wealth planning professional to assess how your portfolio is best positioned, keeping in mind current market dynamics and your long-term financial goals.

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  1. Source: U.S. Bureau of Economic Analysis.

  2. Federal Reserve Bank of New York, Center for Microeconomic Data, “Household Debt and Credit Report, 4th Quarter, 2022.”

  3. Source: Board of Governors of the Federal Reserve System (U.S.). Data as of third quarter, 2022.

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