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Consumer Financial Crunch: Inflation and Higher Interest Rates Creating Significant Hardships

Isaac Nuriani    |
Nov 3, 2023
  • Nearly half of middle-class Americans say they’re stressed about the economy.
  • 62% of adults live paycheck to paycheck.
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Take just a brief glance at some of the nation’s most prominent economic measures, and you’ll likely conclude the American consumer is, on average, a happy camper.

For starters, there’s the nation’s headline unemployment number: 3.9%, which is not only indicative of full employment but also close to the lowest unemployment rate in the last 50 years.[1]

Then there’s overall economic output, as measured by GDP growth. After coming in at a respectable, though muted, 2.1% annualized in the second quarter, GDP grew at more than double that pace in the third quarter, according to the advance estimate released recently by the Commerce Department.[2]

And how about consumer spending, which is said to account for 70% of GDP?[3] That increased 4% in the third quarter and, as it turns out, was responsible for 2.7 percentage points of GDP’s 4.9% growth rate last quarter.[4]

It would seem difficult to dispute that these are strong numbers. And what they represent as far as the “breadth” and “width” of economic activity is such that surely the American consumer is generally optimistic about the outlook for the economy.

Except he’s not.

The Conference Board’s Consumer Confidence Index fell in October for the third straight month.[5] News of the drop comes on the heels of a sharp decline last month in another popular gauge of consumer sentiment: the University of Michigan’s Surveys of Consumers, which also has backslid three months in a row.[6]

If consumers are supposed to feel good because unemployment is low, GDP growth is improving, and they – as a group – are continuing to spend, they’re not getting the message. The transmission of that message, it seems, is subject to a great deal of interference from ongoing inflation and higher interest rates.

The result is an American consumer population that is characterized increasingly by such unpleasant personal economic realities as paycheck-to-paycheck living and even something called a credit-card “doom loop.”

This week, we’re going to visit the front lines of the economic battle being fought daily by consumers. We’re going to learn more about the tremendous pressure so many are facing right now, with an eye to hopefully gaining a better understanding of why upbeat metrics such as low unemployment and surging GDP growth are poor “quality-of-life” indicators for consumers.

Poll: Higher Interest Rates Making Life Difficult for Middle-Class Americans

According to a Harris poll conducted for Bloomberg News, it seems a whole lot of middle-class Americans are worried about the economy.

In fact, the number who say they are worried about the economy has grown over the past year, even though inflation has steadily and significantly declined at the same time.

The survey data suggests fully 44% of middle-class Americans are “stressed” about the economy. That’s up from the 40% who said the same thing a year ago.

So, what’s the culprit? It’s the higher interest rates deployed by the Federal Reserve on behalf of its efforts to bring inflation back to earth. 57% of survey respondents reported that higher interest rates are negatively impacting their household finances.[7]

Paralegal Rebecca Acuna needs a new car. But she’s not going to buy one. Rates right now are simply prohibitive, as far as she’s concerned.

“I could not imagine trying to finance a car with today’s interest rates,” Acuna told Bloomberg. “I’m going to drive my car until the wheels fall off.”[8]

The survey also found that 61% of middle-class Americans believe their financial situations are either worse or unchanged compared to a year ago. And that statistic seems to suggest a frustration – even a bitterness – on the part of Americans about the way in which politicians and ivory-tower economists see their struggles.

“I don’t think anyone in office on a state or federal level has any concept of how stressful it is to manage a budget these days,” said Tiffany Bond, an attorney living in Maine.[9]

John Gerzema, CEO of the Harris Poll seems to agree.

“Economists aren’t sitting at kitchen tables with middle class America,” Gerzema said. “For most, their paychecks are still chasing their bills and they feel they’re falling further and further behind.”[10]

Sure enough, real personal income is sliding again. According to the Commerce Department, personal income, when seen through the lens of inflation and taxes, declined outright in September for the third month in a row.

And the single emotion most selected by respondents as that which they feel when considering the economy?

Stress.[11]

One area in which the matter of higher interest rates appears to be creating exceptional difficulty is for those using credit cards and carrying balances – and there are more of them than ever before.

Let’s look at this next.

More Americans Now Trapped in the Credit-Card “Doom Loop”

You might have read earlier this year that credit card debt in America surpassed the $1 trillion threshold for the first time in history.

When that threshold was surpassed, some observers suggested it was no big deal because household assets had risen in value, as well. The rationale was that rising asset values served to “offset” the higher debt burden.[12]

As it turns out, however that may not be entirely true.

According to data recently released by the Consumer Financial Protection Bureau (CFPB), it seems the number of Americans who find themselves caught in a financially destructive credit-card “doom loop” is on the rise.

A credit-card “doom loop” – or “persistent debt,” as the condition is known more clinically – is a situation in which borrowers are charged more in interest and fees than they manage to pay down in principal. And it’s a situation from which it can be exceedingly challenging to extricate oneself.

One CFPB said, “People get into this situation they can’t get out of. The fees and interest keep people trapped there.”[13]

And according to the CFPB, roughly 10% of credit-card accountholders found themselves caught in this doom loop last year. That’s up from the 8.4% of accountholders who were so mired in 2021.[14]

The CFPB says it’s the decline in real earnings along with higher interest rates that have conspired to push more Americans into persistent debt.

Last year, Americans were smacked with $105 billion in credit-card interest, including $30.5 billion in the fourth quarter – that’s a Q4 total not seen at least 2015, according to the CFPB.[15]

Much of that is attributable to the surge in credit-card interest rates that’s a direct consequence of the Federal Reserve’s efforts to bring down inflation.

The CFPB reports that the average APR (annual percentage rate) on private label cards was a stunning 27.7% by the end of last year. And the average rate on general-purpose cards increased from 18.8% in mid-2020 to 22.7% by the end of 2022.[16]

Unsurprisingly, the CFPB says we should expect to see the number of Americans caught in the credit-card doom loop to rise this year.

“The industry uses rewards to get you in. You think you’re going to pay everything off every month, but sometimes things don’t go as planned,” the CFPB official noted. “If you start carrying a balance, you have to pay a hefty price.”[17]

The CFPB also notes that a disturbingly high number of accounts made only the minimum payment in each month of last year: 13% of general-purpose credit card accounts and 17% of private-label accounts (store credit-card accounts).[18]

And as Americans find themselves increasingly withered by ongoing inflation, interest rates and the cost of using credit cards to try to keep up, an uncomfortably high percentage are living paycheck to paycheck. In fact, says one consumer advocacy group, it now is “the main financial lifestyle among U.S. consumers.”

Let’s learn more about that next.

Living Paycheck to Paycheck Is Now “the Main Financial Lifestyle” in the U.S.

There’s no denying it. Americans are being whipsawed by inflation and higher interest rates. And as they are, many have been forced to adapt to what is, for them, a new way of living…a new “financial lifestyle,” as consumer-finance researchers LendingClub said in a recent report.

Paycheck to paycheck.

Through September, 62% of American adults said they are living paycheck to paycheck. The percentage is unchanged from a year ago.[19]

As the report depressingly noted, “Living paycheck to paycheck remains the main financial lifestyle among U.S. consumers.”[20]

None of this probably should come as a surprise. The current environment represents the most challenging period of inflation since an era four decades ago actually called the “Great Inflation.”

And in the effort to rein in soaring prices this time around, the Federal Reserve has hiked interest rates at the fastest pace in about 40 years.

Those two developments by themselves are challenging enough. But there’s another wrinkle that has served to add even more financial pressure to Americans: the degree to which they have burdened themselves with debt.

This year, total household debt crossed above the $17 trillion mark for the first time in history.[21] And as we discussed earlier, $1 trillion-plus of that is in the form of ultra-expensive credit-card debt.

Prices remain high. Interest rates are high. And Americans are lugging around more debt than ever before. Mix it all together, and it makes perfect sense, frankly, that most of the nation is but one missed paycheck away from finding themselves in financial trouble.

According to Brett House, Columbia Business School economics professor, “Many households are seeing their finances stretched thinly by the combination of high prices for goods and services as well as high interest rates.”[22]

“Many are having to make tough choices to defer discretionary spending in order to stay on top of their loan payments and the costs of necessities,” House added. “The resumption of student loan payments only adds to this stress.”[23]

Persistently high inflation along with just-as-persistently-high interest rates have conspired to create significant personal economic hardships for so many Americans these days.

Under the circumstances, it’s no surprise that consumer confidence continues to sink. Nor will it be a surprise if it turns out the greatly hoped-for – but rarely achieved – soft-landing conclusion to high-inflation/high-rate cycles remains elusive this time, as well.[24]

……..
[1] Bureau of Labor Statistics, “The Employment Situation – October 2023” (November 3, 2023, accessed 11/3/23); Tim Smart, U.S. News & World Report, “2022 Sees a Labor Market Reaching Full Employment” (January 10, 2022, accessed 11/3/23); David Harrison, Wall Street Journal, “Unemployment Falls to 3.4%, Lowest in 53 Years, Jobs Report Shows” (February 3, 2023, accessed 11/3/23).
[2] Bureau of Economic Analysis, “Gross Domestic Product” (October 26, 2023, accessed 11/3/23).
[3] Marc Davis, Investopedia, “The Spending Habits of Americans” (October 17, 2023, accessed 11/3/23).
[4] Jeff Cox, CNBC.com, “U.S. GDP grew at a 4.9% annual pace in the third quarter, better than expected” (October 27, 2023, accessed 11/3/23).
[5] The Conference Board, PR Newswire, “US Consumer Confidence Fell Again in October” (October 31, 2023, accessed 11/3/23).
[6] University of Michigan Surveys of Consumers, “Final Results for October 2023” (October 27, 2023, accessed 11/3/23).
[7] Shawn Donnan, Claire Ballentine and Alexandre Tanzi, Bloomberg.com, “Middle-Class Americans Are Rattled by Fed’s Fight Against Inflation” (October 30, 2023, accessed 11/3/23).
[8] Ibid.
[9] Ibid.
[10] Ibid.
[11] Ibid.
[12] Matthew Fox, Business Insider, “Consumer credit card debt tops $1 trillion for the first time ever” (August 8, 2023, accessed 11/3/23).
[13] Donnan, Ballentine and Tanzi, “Middle-Class Americans Are Rattled.”
[14] Ibid.
[15] Ibid.
[16] Gabriella Cruz-Martinez, Yahoo Finance, “More Americans face ‘persistent debt’ as interest rates and fees rise, report shows” (October 28, 2023, accessed 11/3/23).
[17] Donnan, Ballentine and Tanzi, “Middle-Class Americans Are Rattled.”
[18] Ibid.
[19] Jessica Dickler, CNBC.com, “62% of Americans are still living paycheck to paycheck, making it ‘the main financial lifestyle,’ report finds” (October 31, 2023, accessed 11/3/23).
[20] Ibid.
[21] Jeff Cox, CNBC.com, “Consumer debt passes $17 trillion for the first time despite slide in mortgage demand” (May 15, 2023, accessed 11/3/23).
[22] Dickler, “62% of Americans are still living paycheck to paycheck.”
[23] Ibid.
[24] Piper Sandler, “How Likely Is a Soft Landing? A Look at History Since the 1960s” (March 25, 2022, accessed 11/3/23).

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