Is The US Consumer In Trouble Heading For A Recession? | So Good News

Consumers in the US have been strong since the pandemic began in early 2020. It may sound contradictory, because in the first months of the pandemic, unemployment increased and the economy closed for several months.

But consumers are also spending less as they struggle to contain the spread of COVID-19. Many stimulus bills and extremely low interest rates also boosted their income.

This story has changed recently, however, as the high cost of living has started to eat away at Americans’ finances, leading them to take on more debt. Looking down the barrel of a recession next year, are US consumers in trouble?

Money is running out

It is quite surprising to see the fluctuations in recent years in the savings rate of the US, which is defined as the amount of personal savings as a percentage of personal income. Personal savings rose by a huge amount at the start of the pandemic but have now fallen sharply.

US Personal Savings Rate by YCharts

That’s because inflation has hit America’s pocketbooks hard, rising to the highest levels seen in more than 40 years and driving up prices everywhere from the gas pump to groceries.

There has been growth in wages, salaries and wages rising by about 5.1% in September every year, but it was not enough to keep pace with inflation, which has risen to more than 8% per year for most of 2022.

The buyer is taking on more debt

Another factor is that the consumer now has more debt, possibly due to a decrease in their savings, which has forced them to increase their credit card balance.

US Total Revolving Credit Outstanding data compiled by YCharts

The US debt cycle, which includes credit card debt, has peaked in 2022 at an alarming rate. In fact, household debt increased at the fastest rate seen in 15 years in the third quarter, while credit card balances rose more than 15% in the third quarter, the largest annual increase in more than two decades.

“Credit cards, mortgages, and auto loans continued to rise in the third quarter of 2022, reflecting the combination of consumer demand and rising interest rates,” Donghoon Lee, an economic research adviser at the New York Federal Reserve, said in a research note. report. “However, new lending has slowed to a pre-pandemic level as interest rates continue to rise.”

Debt conditions begin to change

Credit has been strong since the pandemic began, with major banks and credit card lenders reporting low delinquency and delinquency records, which are difficult to collect and a good sign of bad credit.

But there are signs that things are starting to change. In October, many of the major credit card players in the US reported an increase in fraud and chargebacks. According to experts, five of the credit card issuers — Capital One, American Express, Synchrony, Bread Financialand Find out – still in crime 15% lower than in 2019, while payments are 30% below 2019 levels, so stability is expected.

But what’s interesting is that Capital One and Bread Financial, which are closely related to subprime lenders, saw interest rates rise 70 basis points (1 basis = 0.01 percent) and 110 basis points, respectively. For Capital One, that’s more than doubling the rate of interest they’ve seen in October over the past five years, excluding 2020. This is an emerging theme, as credit stability is increasing among low-income borrowers.

How worried should investors be?

There are worrying signs about the financial health of the buyer, who has spent most of his savings and is now taking on more debt. In addition, student loans will start to recover next year, and prices for homes and used cars have started to decline.

If there is a big recession next year and unemployment rises, consumers may suffer, because they will not have the same amount of money to continue paying their bills.

Meanwhile, most economists expect the unemployment rate to rise to around 4.6% next year, according to a Reuters poll, with the top estimate around 6%. A large increase in unemployment can be very harmful to consumers.

But if it happens gradually, things will not be too bad, and as I said, some stability is expected. This is definitely something that investors will want to watch out for because an injured buyer can do a lot of damage and possibly a lot of stock in your portfolio.