Key takeaways

  • Consumer spending was a key driver of strong third-quarter U.S. economic growth.

  • Rising wages help propel continued spending by consumers, even as personal savings rates decline.

  • Can consumers continue to fuel economic growth in the face of higher interest rates and rising household debt?

Consumers continue to play an outsized role in spurring U.S. economic growth despite challenging conditions such as elevated inflation and higher interest rates. Consumer spending is credited as a key driver of this growth, propelling the economy’s surprising annualized growth rate of 4.9% in 2023’s third quarter (advance estimate reported Oct. 26, 2023).1

In 2023’s third quarter, personal consumption expenditures represented nearly 68% of the nation’s Gross Domestic Product. Much of that spending requires financing, some for bigger ticket items like homes, automobiles and higher education and some in the form of credit card debt for day-to-day purchases.

Consumers’ prominent role in the economy is one reason why investors pay close attention to the state of consumer debt. In the second quarter of 2023, total household debt in the U.S. reached a record high $17.29 trillion. This represents a 4.8% increase over the amount of debt held one year prior.2 However, third-quarter debt was only narrowly higher than total debt for the second quarter. “Debt level growth in recent months appears to be in line with wage growth, so at this point, it doesn’t seem to be raising a red flag,” says Rob Haworth, senior investment strategy director at U.S. Bank.

Household savings rates, defined as the proportion of unspent current income, moved higher dating back to the start of the COVID-19 pandemic in early 2020. The combination of government stimulus payments and debt relief for individuals and a temporary closing of many U.S. businesses that limited spending options helped boost savings rates. At its peak in April 2020, the U.S. personal savings rate topped 33%. It dropped to as low as 2.7% in June 2022, then increased to 4.3% by June 2023 before dropping to 3.4% in September.3 “Something closer to 6% is considered typical,” says Haworth. “Consumers have seen wages rise but have been spending that money. At some point, they’ll decide they want to rebuild savings, though that may come at the expense of consumer spending activity.”

With savings rates in decline, do consumers run a risk of taking on too much debt that eventually triggers a cut back on spending? If that occurs, what are the potential economic and capital market implications?


Putting “record household debt” into perspective

The data show that consumers are borrowing at a more rapid pace. It began in late 2022, according to Haworth. “We saw a meaningful rise in the amount of consumer borrowing, mostly in the form of unsecured revolving credit, like credit cards.” Total credit card debt in the U.S. topped $1 trillion for the first time ever in the second quarter of 2023 and hit another record level in the third quarter.4 Credit card debt increased 16.7% for the one-year period ending September 30, 2023.2

Chart depicts changing household debt from Q3 2022 to Q3 2023 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, 3rd Quarter 2023.”
*Includes retail cards and other consumer loans.

The upward trend in consumer debt that began 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. “As inflation became a burden and government payments ended, consumers were willing to take on more debt,” says Schoeppner.

Haworth notes, however, that some perspective is helpful. “If people are borrowing more money, the question is whether they are in a position to pay it back,” says Haworth. “Consumers today appear to be protecting their balance sheets. They aren’t on a borrowing spree, but borrowing up to a point where it makes sense for them.” As shown in the chart below, through 2023’s second quarter, 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 in 2007 and 2008, when debt amounted to more than 13% of disposable income.5

Chart depicts annual household debt service payments as a percentage of disposable income from 2000 to June 30, 2023.

Source: Board of Governors of the Federal Reserve System (US). As of June 30, 2023.


Manageable consumer debt levels

Schoeppner believes 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. “For now, the labor market remains robust,” says Haworth. “A key number to watch is initial weekly jobless claims.” That number rose to 265,000 in June 2023, its highest reading since October 2021. Weekly claims have dropped since that time.6 “It will become more concerning if initial weekly jobless claims consistently rise above 300,000,” says Haworth.

“Consumers have seen wages rise but have been spending that money. At some point, they’ll decide they want to rebuild savings, though that may come at the expense of consumer spending activity,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.

Does consumers’ willingness to continue spending complicate the Federal Reserve’s effort to lower 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.


Keeping an eye on debt

Consumer debt trends warrant monitoring in the months to come. Is there a risk of consumers 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. This metric remains relatively low based on the most recent data. “If it starts to tick up meaningfully, it could trigger more concerns about the potential for consumers 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 debt to maintain current spending levels,” says Haworth.

Another immediate focus will be holiday sales as 2023 ends. Haworth notes a couple of areas of concern that could be reflected in consumer spending. “Student loan repayments, which were suspended for several years, are now required again for most borrowers. In addition, bank surveys show that loan demand is down.” Both could be signs of a potential holiday spending pullback, though healthy wage growth may help overcome such concerns.

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, 3rd Quarter, 2023.”

  3. Source: U.S. Bureau of Economic Analysis, Personal Saving Rate, Seasonally Adjusted Annual Rate.

  4. Dickler, Jessica, “Household debt is at an all-time high, but 2008 was still worse, report finds,”, Aug. 25, 2023., and Federal Reserve Bank of New York, Center for Microeconomic Data, “Household Debt and Credit Report, 3rd Quarter, 2023.”

  5. Source: Board of Governors of the Federal Reserve System (U.S.). Data as of first quarter, 2023.

  6. Source: U.S. Employment and Training Administration.

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