Recession Watch: Are Americans Nearing Their Credit Card Limits?
The comments below are an edited and abridged synopsis of an article by Mike Maharrey, Money Metals
(569 words, 3 minutes read time.)
Are American Consumers Nearing Their Credit Card Limits?
In the face of rising living costs and stagnant wages, American consumers have increasingly turned to credit cards to make ends meet. With interest rates exceeding 20% on average, however, this reliance on plastic may be nearing its breaking point. Credit cards, after all, come with an unavoidable restriction: A limit.
Recent data suggests that the American consumer is rapidly approaching the end of their financial rope.
Declining Credit Card Spending
Credit card usage has been steadily declining for several months, with a sharp drop reported in November, according to the Federal Reserve. Consumer debt overall plunged by $7.5 billion during that month, primarily due to a 12% decline in revolving credit—mainly credit card balances.
Such significant drops in consumer debt often signal the early stages of an economic recession. While this decline may appear to offer temporary relief, it does little to alleviate the broader debt crisis facing American households.
Mounting Debt Levels
Despite the recent contraction in credit card borrowing, American consumers remain burdened with over $5.1 trillion in consumer debt. This figure includes credit card balances, student loans, and auto loans but excludes mortgage debt. When factoring in mortgages, US household debt reaches a record-breaking $17.94 trillion as of the third quarter of last year.
Signs of A Financial Strain
The trend of increasing credit card borrowing, which began in May 2021, slowed significantly by March 2023. Since then, revolving credit has shown erratic fluctuations, with borrowing tanking in April, June, and August, followed by a tepid September. While there was a brief surge in October, November’s sharp decline indicates that consumers are tightening their belts and curbing spending.
This erratic borrowing behaviour reflects growing financial strain among American households. As inflation persists and interest rates remain high, the cost of borrowing continues to rise, making it increasingly difficult for consumers to manage their debt loads.
What This Means for The Economy
The decline in credit card spending suggests that consumers are reaching their credit limits and may no longer be able to sustain their spending habits. This slowdown in consumer activity—a critical driver of the US economy—could be a precursor to a broader economic downturn.
Additionally, the record-high household debt poses significant risks to financial stability. With interest rates unlikely to drop significantly in the near term, many consumers may find themselves struggling to make even minimum payments on their debts, further exacerbating economic challenges.
Conclusion
The latest trends in credit card spending and household debt paint a concerning picture of American consumers nearing the edge of their financial capacity. As borrowing slows and debt levels remain high, the likelihood of a recession grows. This serves as a stark reminder of the need for prudent financial planning and a more sustainable approach to managing household debt.
While these challenges loom large, they also underscore the importance of addressing the systemic issues contributing to rising debt levels and economic inequality. For now, all eyes remain on the data as economists and policymakers assess the unfolding situation.