Consumer Spending Has Sustained the American Economy. That May Change

The American consumer spirit has kept the economy of the United States relatively strong, despite the highest inflation in the last two decades. But this attitude may change soon. Some experts believe that the combination of high housing costs, rising credit card debt, and dwindling savings could signal the end of post-Covid spending. Perhaps this trend can already be felt during this year’s holiday shopping season.Housing costs are the highest in the last 40 yearsBuying a home is more expensive than at any time in the last 40 decades. Mortgage rates have more than doubled in the past year. Now, nearly 41% of the average monthly income of a family is needed to pay the monthly payments on a median-priced home, according to a survey by the Intercontinental Exchange (ICE). The last time housing payments cost this much was in 1984.Americans are in more debt than everInflation has also impacted spending on other types of purchases. Balances on non-housing loans have more than doubled since 2003, totaling around $4.8 billion, according to data from the New York Federal Reserve. More than $500 billion of that debt was accumulated in just the last two years.Part of this debt comes from the surge in car prices, but credit card balances are the fastest-growing – about 34% since the fall of 2021. Keeping up with high prices has not only led to more credit card debt but also to more consumers with late payments. During the third quarter, 5.78% of credit card balances became delinquent (90 days or more overdue). Since the first quarter of 2022, the rate of delinquent credit card debt has increased by about 90%.A study released by the San Francisco Federal Reserve (SF FED) earlier this year revealed an important clue as to why American consumers are willing to pay higher prices and continue spending: high levels of savings.Families saved billions of dollars more per month in 2020 and 2021 compared to the pre-pandemic period, according to the SF FED. A major reason why these piggy banks became so full was the “refinancing boom” that occurred during that time of historically low mortgage rates. From the second quarter of 2020 until the end of 2021, 14 million mortgages were refinanced, resulting in an estimated extraction of $430 billion in capital.Additionally, under the lockdown caused by Covid-19, consumers were not going out. This means that all the money that would have been spent on goods and experiences went to fattening families’ piggy banks.As the pandemic waned, consumers unleashed pent-up demand for experiences they could not partake in during the Covid period, such as traveling. And in the last two years, Americans have been spending all that savings, even as prices and interest rates continue to rise.During the pandemic, consumers accumulated $2.1 trillion in savings. By June 2023, they had already spent $1.9 trillion of that amount, concluded the SF FED.With savings nearly depleted, Americans may be forced to finally pull back on their post-Covid spending spree. This may start to be felt now at the end of the year, with more restrained spending on Christmas shopping.Wait and see!Source: CNN