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Consumer-Debt Surge: Is This the Real Driver of Economic “Growth”?

Isaac Nuriani    |
Nov 17, 2023
  • Credit-card debt jumped another 5% in the third quarter.
  • Retail sales dropped in October for the first time in seven months.
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Look at the nation’s “headline” gauges of the economy’s health, and you just might conclude that things are pretty darn good, overall.  

Take the unemployment rate, which we hear about as an economic metric as often as any other measure of the economy. Although the government’s official unemployment rate ticked up a tenth of a point in October, it remains below 4% which indicates full employment.[1] It has, in fact, been at that 4%-or-below level since December 2021.[2]   

There’s also the growth rate of gross domestic product (GDP). In spite of persistent inflation and rising interest rates, the nation’s economic output has grown at an annualized rate above 2% for each of the last five quarters. And in the third quarter of 2023, GDP grew at a particularly impressive 4.9%.[3] 

And we can’t forget consumer spending, which represents roughly 70% of GDP.[4] That’s been on the plus side all year long, increasing every month in 2023 (on a month-over-month basis).[5] 

Given just how relatively robust each of these metrics is, it might surprise you to learn that consumer sentiment keeps dropping. From August through October, The Conference Board’s Consumer Confidence Index fell three straight months.[6] And as of the beginning of November, the University of Michigan’s Index of Consumer Sentiment has fallen for four straight months.[7] 

Considering these good-looking numbers, you also might be surprised to learn that a significant number of Americans are frustrated with the economic stewardship provided by our elected officials. A recent Financial Times poll found that just 14% of the country believes it’s financially better off under President Biden, while a whopping 70% of respondents said his economic policies – now known as “Bidenomics” – have either hurt the economy or otherwise not helped it.[8] 

So what accounts for the “disconnect”? 

Maybe a closer examination of the economy – an examination that demands you look past all those cheery headline figures – might help explain.  

Let’s drill down on the spending that’s helped fuel the economy. It might interest you to know that real wage growth (earnings after inflation and taxes) has declined in each of the last three months.[9]  

So, from where have Americans been getting the money for all the spending that sends GDP growth ever higher?  

They’ve been going into debt. A lot of debt. 

In the first quarter of this year, the Federal Reserve Bank of New York reported that total household debt crossed above the $17 trillion threshold for the first time ever.[10] And then in the second quarter, the New York Fed informed us that credit-card debt, specifically, surpassed $1 trillion for the first time.[11] 

Now, the New York Fed is back with an update on the indebtedness of American households – and the news keeps getting worse: Through the third quarter of 2023, both total household debt and credit-card debt reached new – and extraordinary – all-time highs. 

Experts have seen enough. They are concluding that the spending being done by the “resilient” American consumer has – for some time – been accomplished by a heavy reliance on debt 

Which means it has a very finite lifespan. 

In fact, there are signs we now may be seeing the beginning of the end of debt-fueled consumer spending – and with it, the end of the economy that “magically” has thrived in spite of the worst cycle of inflation and higher interest rates in 40 years. 

Let’s see if we can get to the bottom of this. 

First up: a look at the latest consumer-debt numbers.  

Credit-Card Balances Surged Another 5% Higher in the Third Quarter 

Relentless. That seems about the best way to describe the accumulation of debt by American households these days. 

According to the Federal Reserve Bank of New York, consumers pushed their record household-debt total $228 billion higher in the third quarter, to $17.29 trillion. That translates to a 1.3% increase over the total reached in the second quarter.[12] 

Perhaps even more profound is the increase in credit-card debt realized last quarter. Consumers racked up another $48 billion on their plastic in Q3, bringing the total up to $1.08 trillion – a near-5% quarter-over-quarter increase.[13] The balance growth in Q3 also represents a year-over-year increase of $154 billion – the biggest such move upward since 1999.[14] 

Adding to the aforementioned “relentlessness” of the increase in consumer debt, of course, has been the equally relentless rise in interest rates – and their impact on balances. According to Forbes, the average – average – overall annual percentage rate (APR) on all credit-card types is 27.8% as of a few days ago.[15]  

According to a recent report issued by the Consumer Financial Protection Bureau, U.S. cardholders paid a stunning $130 billion in interest and fees (combined) last year. And a separate report by consumer finance company WalletHub maintains cardholders paid roughly $164 billion in interest and fees in 2022.[16]  

Of course, household debt is made up of a lot more than credit-card debt. As it turns out, the total balances in each category of debt climbed higher last quarter. 

According to the New York Fed, mortgage balances increased by $126 billion in Q3, to a total of $12.14 trillion. Notably, originations actually declined last quarter, a fact which underscores the impact of rising rates on overall mortgage debt. Home equity lines of credit rose by $9 billion, to a total of $349 billion.[17] 

Other notable balance increases include those for auto loans, which increased by $13 billion last quarter to $1.6 trillion. The New York Fed report made special mention of the fact that the total debt balance on auto loans has done nothing but rise since 2011.[18]  

Experts say the accumulation of all this debt is not incidental to the growth of consumer spending – and, in turn, to the growth of the economy, overall. 

Let’s see what several of them have said recently about this. 

Economist: Consumer Spending “Being Held Up by Credit Card Debt”  

One question some might have is, “Why aren’t consumers using savings to spend instead of hyper-expensive credit?” 

They have been. Or, at least, they did. But the research suggests that money is largely depleted. 

According to the Federal Reserve Bank of San Francisco, Americans had managed to accumulate a “stash” of excess savings by August in the astonishing amount of $2.1 trillion – a pandemic “dividend,” of sorts, generated largely from the combined aggregate effect of stimulus payments and lockdowns.[19] 

The San Francisco Fed’s report estimates that just $190 billion of that sum remained as of June 2023. The report goes on to project that all of the excess savings was depleted at some point in the third quarter.[20] 

And some experts say that as Americans were steadily burning through all that cash, they unhesitatingly started turning to credit to keep spending. 

“We had all-time high household savings and inflation strikes and people have to do something about that,” John Sedunov, a finance professor at Villanova University’s School of Business, recently told ABC News. 

“People have to deal with this somehow,” he added. “After blowing through savings to buy essentials, they do what’s next: Find sources to borrow.”[21] 

Many other economists and finance professionals suggest the principal driver of consumer spending is now consumer debt. 

On that note, Mary Hansen, an economics professor at American University, remarked to ABC News that “consumer spending, which we all know is the base of GDP, is really being held up by credit card debt and maybe it’s not sustainable.”[22] 

Howard Dvorkin, chairman of credit counseling and education resource Debt.com, also believes the use of credit by Americans is playing a significant role in consumer spending right now. Dvorkin recently declared to CNBC that “consumers are maintaining and supporting their lifestyles using credit card debt.”[23] 

Notably, all of this spending does not seem to be making for happy consumers. I submit as Exhibits A and B the previously referenced Conference Board and University of Michigan consumer sentiment surveys, each of which have been tracking lower for several months now. 

Let’s talk more about that – and the significant problem for the economy it may telegraph. 

Retail Sales in October Decline for the First Time in Seven Months 

I mentioned earlier that consumer spending makes up 70% of GDP. The growth of GDP in the third quarter surged at an annual rate of 4.9%…more than double the rate notched in the second quarter.[24] 

Oddly (it would seem), the third quarter also was marked by steady declines in both the Conference Board and Michigan consumer-sentiment gauges. 

All that spending…amid all that apparent pessimism. Curiouser and curiouser. 

A recent Wall Street Journal article examined this very issue, and more or less concluded that circumstances are such that many consumers simply have decided to check their financial prudence at the door and keep spending: 

A tough housing market has more consumers writing off something they’d historically save for, while the pandemic showed the instability of any long-term plans related to health, work or day-to-day life. So, they are spending on once-in-a-lifetime experiences because they worry they may not be able to do them later.[25]  

“I might as well just enjoy what I have now,” said one article subject.[26] 

Last month, AP News noted that, “U.S. consumers keep spending despite high prices and their own gloomy outlook,” and asked, “Can it last?”[27] 

Maybe not. Regardless of what’s driving consumers to keep spending in spite of high inflation, high interest rates and declining real income (wants, needs or perhaps some of both), signs are starting to emerge that the ringing cash registers may be about to fall silent. 

For one thing, the San Francisco Fed told us they think the excess savings Americans had socked away two years ago officially ran dry in Q3. Also, as debt balances continue to ascend further to record heights, it appears delinquencies are rising along with them. 

According to the New York Fed, 3% of outstanding debt was in some stage of delinquency in the third quarter, up from 2.6% in Q2. The Fed also reported that every category of debt except student loans saw delinquency rates rise last quarter. Revealingly, there was a big jump – nearly 60% – in the year-over-year rate in serious delinquencies (defined as delinquent for 90+ days) from Q3 2023 to Q3 2022: 5.78% vs. 3.69%.[28] 

Then there’s this: We just learned a couple of days ago that retail sales in October fell for the first time in seven months.[29] 

Savings evaporating. Debt balances surging. Delinquencies rising. And now…unsurprisingly, some would contend…sales are slowing. 

Understandably, consumers will be tempted to see these activity trends exclusively through the lens of their own personal situations. But economists and policymakers look at this more in the context of what it could mean to the economy. 

Analyst: Economy Is Approaching an “Inflection Point” 

Larry Adam, chief investment officer at Raymond James, recently said debt-fueled spending ends one way for the economy: recession. In a client note, Adam suggested consumers’ “ability to continue to consume indiscriminately is coming to an end.”[30] 

Similarly, wealth manager Michael Farr said recently he sees the economy approaching an “inflection point,” warning, “The elasticity of consumer demand will at some point be faced with the inelasticity of the consumer’s wallet.”[31] 

For its part, The Conference Board sees the U.S. possibly falling into recession next year, as well. Noting that “consumer spending has held up remarkably well,” the board’s view is that the spending cannot continue, due in no small way to the fact that “household debt is rising.” The board projects declining consumer spending throughout the first two quarters of 2024.[32] 

If it were the case that consumers are spending on the back of rising real-wage growth, it would be easier to believe the economy just might pull off the ever-elusive, unicorn-like “soft landing.” 

But, in the opinion of some experts, that doesn’t appear to be the case. The numbers seem to show that heavy reliance on debt is a significant driver of consumer spending right now. If that’s true, the “thriving” economy may be surviving on time that’s every bit as borrowed as the money that Americans are using to support it. 

[1] Bureau of Labor Statistics, “The Employment Situation – October 2023” (November 3, 2023, accessed 11/16/23); Tim Smart, U.S. News & World Report, “2022 Sees a Labor Market Reaching Full Employment” (January 10, 2022, accessed 11/16/23). 
[2] Bureau of Labor Statistics, “Labor Force Statistics from the Current Population Survey” (accessed 11/16/23). 
[3] Trading Economics, “United States GDP Growth Rate” (accessed 11/16/23). 
[4] Bryan Mena, CNN Business, “US consumer spending was much weaker in the second quarter than previously estimated” (September 28, 2023, accessed 11/16/23). 
[5] Bureau of Economic Analysis, “Consumer Spending” (October 27, 2023, accessed 11/16/23). 
[6] The Conference Board, “US Consumer Confidence Fell Again in October” (October 31, 2023, accessed 11/16/23). 
[7] University of Michigan Surveys of Consumers, “Preliminary Results for November 2023” (accessed 11/16/23). 
[8] Lauren Fedor, Eva Xiao and Oliver Roeder, Financial Times, “Only 14% of US voters say Joe Biden has made them better off” (November 13, 2023, accessed 11/16/23). 
[9] Bureau of Economic Analysis, “Personal Income and Outlays, September 2023” (October 27, 2023, accessed 11/16/23). 
[10] Stephen Neukam, The Hill, “Consumer debt passes $17T for first time” (May 15, 2023, accessed 11/16/23). 
[11] Ann Saphir, Reuters.com, “US credit card debt tops $1 trillion, overall consumer debt little changed” (August 8, 2023, accessed 11/16/23). 
[12] NewYorkFed.org, “Quarterly Report on Household Debt and Credit” (November 2023, accessed 11/16/23). 
[13] Ibid. 
[14] Federal Reserve Bank of New York, “Credit Card Delinquencies Continue to Rise—Who Is Missing Payments?” (November 7, 2023, accessed 11/16/23). 
[15] Michelle Black and Robin Saks Frankel, Forbes.com, “What Is The Average Credit Card Interest Rate This Week?” (November 13, 2023, accessed 11/16/23). 
[16] Ana Teresa Solá, CNBC.com, “Credit card users paid $130 billion in fees, interest in 2022, federal watchdog says” (October 25, 2023, accessed 11/16/23). 
[17] NewYorkFed.org, “Quarterly Report on Household Debt and Credit.” 
[18] Ibid. 
[19] Hamza Abdelrahman and Luiz E. Oliveira, Federal Reserve Bank of San Francisco, “Excess No More? Dwindling Pandemic Savings” (August 16, 2023, accessed 11/16/23). 
[20] Ibid. 
[21] Max Zahn, ABC News, “Credit card debt has reached a record high. Here’s what it means for the economy.” (November 8, 2023, accessed 11/16/23). 
[22] Ibid. 
[23] Jessica Dickler, CNBC.com, “Credit card balances spiked in the third quarter to a $1.08 trillion record. Here’s how we got here” (November 7, 2023, accessed 11/16/23). 
[24] Bureau of Economic Analysis, “Gross Domestic Product” (October 26, 2023, accessed 11/16/23). 
[25] Rachel Wolfe, Wall Street Journal, “Americans Are Still Spending Like There’s No Tomorrow” (October 1, 2023, accessed 11/16/23). 
[26] Ibid. 
[27] Christopher Rugaber and Anne D’Innocenzio, AP News, “US consumers keep spending despite high prices and their own gloomy outlook. Can it last?” (October 30, 2023, accessed 11/16/23). 
[28] NewYorkFed.org, “Quarterly Report on Household Debt and Credit.” 
[29] Bryan Mena, CNN, “US retail sales fell in October for the first time in seven months” (November 15, 2023, accessed 11/16/23). 
[30] Matthew Fox, Business Insider, “A recession is about to hit the US economy and these 3 warning signs are defying the consensus view, Raymond James says” (October 23, 2023, accessed 11/16/23). 
[31] Hamza Shaban, Yahoo Finance, “Consumer spending set to slow as inflation drags on households” (September 12, 2023, accessed 11/16/23). 
[32] The Conference Board, “Economic Forecast for the US Economy” (accessed 11/16/23). 
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