Consumer borrowing declined substantially in August as mounting pressure from Federal Reserve rate increases put the squeeze on homebuyers and other Americans.
Outstanding consumer credit fell by $15.6 billion in August, according to Federal Reserve data released Friday. The decline contrasts sharply with the $11.3 billion increase in borrowing totals forecast by economists surveyed by
FactSet.
Outstanding revolving credit did climb month over month, rising by $14.7 billion, which indicates that Americans are still adding to their credit-cards balances at a steady clip. Revolving credit totals increased at annual rate of 13.9%.
But nonrevolving credit, which encompasses student and auto loans, declined by $30.3 billion. This was a decrease of 9.8% at an annualized rate.
The shrinkage in borrowing rates in August was largely driven by this decline in non-revolving credit, said Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research. “It was a large drop and suggests that loan rates are too high for most consumers to finance larger purchases,” Jones wrote on X, formerly known as Twitter.
Although the August figures aren’t the freshest—employment data for September also landed on Friday—consumer borrowing is an economic indicator that is worth watching, especially in the current high-rate environment. If Americans pile up too much debt, they could be forced to pull back on their spending, with a potentially broad impact given that consumer spending tends to be a major economic driver.
Despite the rising interest rates and persistent inflation, most consumers have been able to stay afloat for now. Even as Americans’ total credit card debt hit a record of $1.03 trillion during the second quarter, overall delinquency rates remained relatively flat. Credit-utilization ratios, comparing consumers’ borrowing to the amount of money lenders have offered them, haven’t soared either.
The relative health of consumers’ finances is due in large part to the strength of the job market. People struggle the most to pay their debts when they lose their jobs. As long as unemployment remains low and jobs are available, borrowers overall can typically make regular payments on their loans and credit cards, even as they burn through savings put aside during the pandemic.
And it turns out, there may be more wiggle room for consumers, given that the U.S. economy added a surprising 336,000 new jobs in September, according to Bureau of Labor Statistics figures released Friday. The agency also revised its figures for jobs gains for July and August to show an additional 119,000 positions were added.
The jobs data, therefore, indicates that hiring actually accelerated over the summer, which helps explain the upswing in consumer spending and overall economic growth the U.S. has experienced, writes KPMG Chief Economist Diane Swonk.
A concern is that while payrolls grew faster, gains in wages have been slowing, Friday’s BLS data showed. Year-over-year gains in average hourly earnings slowed to 4.2% in September from 4.3% in August. But hourly pay is growing at a 3.4% rate on a three-month annualized basis, putting it near to the more normalized, prepandemic levels seen in 2019, writes Nick Bunker, head of economic research at the Indeed Hiring Lab.
The combination of slower wage growth and higher interest rates indicate that the headwinds are mounting against consumers. About 60% of Americans reported they are living paycheck to paycheck as of August, according to
Lendingclub’s
Reality Check: Paycheck-To-Paycheck research series.
And the survey data indicate that the trend cuts across all income brackets. A significant portion of low-, middle- and high-income households report they don’t have any money left over at the end of the month. Nearly one in five Americans living paycheck to paycheck report having problems paying their bills.
And while the labor market has remained surprisingly robust, it will likely shift more toward prepandemic norms over time, even if the Fed wins its fight against inflation without causing a recession. While the unemployment rate remained steady at 3.8% in September, economists consider rates above 4% to be more normal over the long term.
If unemployment rises from its current level of 3.8% to 4.4%, for example, economists have estimated that over a million Americans could lose their jobs. That financial stress, plus the way the recent surge in longer-dated bond yields is lifting interest payments on credit-card debt, could tip the economy toward a time when consumers really struggle to pay what they owe, and some fail.
That would spell trouble for banks, retailers, restaurants, travel, and much more of the economy.
Write to Megan Leonhardt at [email protected]
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