The Bureau of Economic Analysis on Friday published new data for personal consumption expenditures, revealing a 2.6% rise in the price of goods over the past year and a 0.7% surge in consumer spending, coming in higher than the 0.4% increase analysts expected. With fears of a recession easing, Wall Street is celebrating the resilience of the consumer and the economy’s soft landing. But this “immaculate disinflation” comes at the cost of Americans’ savings.
U.S. household savings, which peaked at over five trillion dollars during the pandemic thanks in part to Biden’s stimulus payments, have now fallen below pre-pandemic levels as indicated by the San Francisco Federal Reserve. Although 2023 saw an initial surge in savings for the first five months, savings dwindled by $293.3 billion afterward, ending at $766.7 billion compared to $1.051 trillion four years prior. This suggests that wages are not keeping up with Americans’ spending habits.
In the face of these diminishing personal savings, Americans have a choice: They must either cut back on their spending so their household budgets reflect the real value of their wages, or maintain their living standards by incurring additional debt.
Despite the high interest rate landscape, a significant number of Americans seem to have already opted for the latter. According to November data from the New York Federal Reserve, American households had accumulated over $17.29 trillion in debt by the end of September 2023. Of particular concern is that high-interest credit card debt constituted $1.08 trillion of this total — a nearly 5% increase from June 2023. This means the average customer saw their credit card balance bounce from $5,474 in September 2022 to $6,088 in a year later, according to Transunion. During the same period, delinquency rates climbed from 2.08% to 2.98%, the highest rate since 2012.
By the end of 2023, people were already trying out new ways to take on debt through buy now, pay later schemes. Throughout the Christmas season, the use of this payment method increased by 14% from the prior year, contributing a significant $16.6 billion to online spending. Meanwhile, Cyber Monday alone witnessed a surge of over 40% in usage of buy now, pay later payment methods.
The economy’s overall growth of 3.1% over the last year is an inaccurate representation of the health of American finances. With diminished savings and burdensome debt, consumers will struggle to make their payments in the coming year. Yet, as the personal consumption expenditures index has stayed above the Federal Reserve’s benchmark of 2% for the past 33 months, there is very little that can be done by those in Washington without potentially harming the economy at-large through further inflation.
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On Capitol Hill, the typical remedy of passing a stimulus package, historically a politically popular tactic, poses the risk of rekindling inflation as in the 1970s and exacerbating the already massive national debt, with additional hurdles due to the budgetary issues driven by the House Freedom Caucus. Likewise, the Federal Reserve will have to choose between continuing to fight inflation or giving up its battle to cut rates and initiate another round of quantitative easing.
Nonetheless, while politicians and media personalities clamor about the “resilient consumer,” the current direction of consumer savings shows that this spending spree must end, and soon, as the effects of the pandemic-induced “sugar high” wear off and savings dwindle. At that point, the famous quote by economist Thomas Sowell will once again ring true: “There are no solutions. There are only trade-offs.”
Daniel Elmore is a Young Voices contributor studying economics at Lenoir-Rhyne University. Follow him on Twitter @daniel_j_elmore.