Credit card debt climbed to a record high in the third quarter of 2023, surging nearly 5% from the previous quarter and leaving a growing share of borrowers late on payments, a Federal Reserve report this week showed.
The report demonstrates the dwindling savings held by some consumers who amassed a financial buffer during the pandemic but later burned through it under the strain of rapid price increases, economists told ABC News.
The financial hardship, they added, has fallen primarily on low-income people squeezed between elevated prices and high interest rates who borrowed money to cover the rising expenses.
The economists differed, however, on the economic implications of the credit card debt. Some treated the data as evidence of an alarming trend that foretells weakness for U.S. consumers and a potential economic slowdown. Others said the debt doesn’t threaten the wider economy.
Here’s what to know about what the record credit card debt means for the economy:
Consumers are spending the savings built up during the pandemic
The Fed report marks the latest indication that some consumers have exhausted savings built up during the pandemic as a means of weathering high prices, economists said.
The average net worth of U.S. households skyrocketed nearly 40% between 2019 and 2022, a rate more than double a previous record high in the early 2000s, the Federal Reserve found last year.
U.S. credit card debt briefly fell during the pandemic but has climbed since 2022
Federal Reserve Bank of New York Consumer Credit Panel
The surge coincided with a rapid rise in prices, however, as inflation reached a peak last summer. In turn, the average savings rate for U.S. households has plummeted since 2022, the Fed said last month.
“We had all-time high household savings and inflation strikes and people have to do something about that,” John Sedunov, a finance professor at Villanova University’s School of Business, told ABC News.
“People have to deal with this somehow,” he added. “After blowing through savings to buy essentials, they do what’s next: Find sources to borrow.”
U.S. consumers, who account for nearly three-quarters of U.S. economic activity, drove breakneck economic growth in recent months, Mary Hansen, an economics professor at American University, told ABC News. The data released this week suggests the consumer spending was fueled in part by debt, she noted.
“Consumer spending, which we all know is the base of GDP, is really being held up by credit card debt and maybe it’s not sustainable,” Hansen said.
In this undated file photo, a woman is shown shopping online.
STOCK PHOTO/Getty Images, FILE
High prices are squeezing low-income people
The jump in credit card debt also indicates that elevated inflation has imposed acute hardship on some low-income people, economists said.
Overall delinquency rates on a range of consumer loans — including credit card, auto and student borrowing — ticked up to 3% over a three-month period ending in September, the Fed report showed.
“The increase in credit card debt and delinquencies reflects in part the increased financial stress on lower-income households, who have been hit hard by the higher cost of living,” Mark Zandi, chief economist at Moody’s Analytics, told ABC News.
Low-income people in financial distress have responded to high prices in part by taking on additional credit card debt. But such loans come with high interest rates that can exacerbate an individual’s budget problems, Hansen said.
Average credit card interest rates stand at nearly 21%, Bankrate found last week. That figure is up from roughly 16% at the outset of 2022.
“It puts people on the low end of the income distribution in a real bind,” Hansen said.
While the difficulty faced by low-income people hold significant implications for their financial outlook, such hardship bears little on the wider economy since low-income people account for a relatively small share of overall consumer spending, Christian Weller, a public policy professor at the University of Massachusetts at Boston, told ABC News.
In contrast with Hansen, Weller said the rise in credit card debt and delinquency falls short of posing a threat to the economy.
“We’ve had really gangbusters consumption,” Weller said. “A lot of this was driven by consumption among upper and middle income households.”
He added, “Those people still have more cash on hand.”
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
