US consumer financial strains continue to grow

2024-03-24 08:21

  • US household debt rose to US$17.3trn in the third quarter, up by 1.3% quarter on quarter and by 4.8% year on year, according to the latest survey from the Federal Reserve Bank of New York. Credit-card debt in the first three quarters of 2023 was up by nearly 17% year on year, the largest increase on record.

    The recent increase in household debt (particularly credit-card debt, which primarily supports consumption) fits with our forecast that US consumer spending will start to moderate in 2024, after two years of rapid growth. Real private consumption rose by 3.6% in the third quarter (in quarter-on-quarter, annualised terms), the main factor driving GDP growth. The prolonged strength of consumer spending, which makes up about 70% of total GDP, is the main reason why we recently revised up our 2023 real GDP growth estimate from 2% to 2.4%.

    However, the factors underpinning this strong consumption growth are starting to soften. The University of Michigan’s consumer sentiment index slipped from 63.8 in October to 60.4 in November, marking the fourth consecutive monthly drop. The indices reflecting current economic conditions and consumer expectations were also lower. The survey noted that the decline is primarily due to the impact of high interest rates, particularly among lower-income and younger consumers.

    Real private consumption growth was particularly strong in Q1 and Q3 2023, growing by more than 3.6% quarter on quarter, annualised. EIU forecasts quarterly growth to slow to around 1% in Q4 and to dip by -1% in Q1 2024, as consumer spending hits its softest point before recovering gradually thereafter.

    Households’ financial cushions are being drawn down as the excess savings accumulated during the pandemic have gradually been spent, but the savings rate has remained historically low. This also suggests that there is less room for consumer spending growth to continue at the current pace. The latest household debt report by the Federal Reserve Bank (Fed, the central bank) underlines these growing strains on household finances. Among other factors, higher prices for goods and services and the end of a moratorium on student loan repayments are pushing some consumers to rely more heavily on credit to support their spending.

    The move into new delinquency, that is 30 days or more late, is still below pre-pandemic levels for all forms of credit. However, the rate of delinquency is rising quickly from a low point during the pandemic, most notably credit-card debt, 8% of which was in early delinquency as of Q3 2023.

    Delinquency rates on all loan types have also risen markedly, albeit from the historic lows in 2021, when household finances were buoyed by large pandemic-related subsidies, reduced consumption opportunities and a general reluctance to spend. In the third quarter 8% of credit-card balances were in early delinquency (30 days or more late), the highest rate since 2011, when the effects of the global financial crisis were wearing off.

    What next?

    We expect consumers to pull back their spending in 2024 given the rising debt levels and still-high interest rates. However, strengthened household finances in recent years and our forecast for continued real wage growth will help to avoid a steeper slowdown. We maintain our forecast for modest GDP growth of 0.9% in 2024.

    The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.