over 1 year ago • 2 mins
US households have been using credit at a record pace since Covid, with the measure of revolving credit outstanding – mostly credit card debt, but also other lines of credit – just breaching an all-time high (blue line). Should you be worried?
On one hand, you shouldn’t be: US consumers are sitting on record cash savings accumulated during the pandemic, their debt as a percentage of disposable income is nowhere near the highs we saw in the runup to the 2008-09 global financial crisis, and credit-card debt doesn’t represent a huge part of consumer spending power. Put more simply, this isn’t 2007 again.
On the other hand, maybe you should be a little worried: this suggests that trouble might be brewing under the surface. Often, an increase in credit card debt is a sign that the economy is expanding. But if it happens when inflation is squeezing consumers' budgets, when the cost of servicing that debt is just skyrocketing, and when the economic outlook has never looked darker, there’s probably a more troubling explanation: an increasing number of consumers are being forced to use credit cards to make ends meet.
And while, on average, consumers are in much better shape today, things could turn sour pretty quickly. The savings accumulated during Covid aren’t eternal, and an even higher number of consumers might yet be forced to take on debt to pay the bills if the economy continues to deteriorate and if inflation remains stubbornly high. And when you combine more debt, a higher cost of servicing that debt, and a shrinking disposable income, that represents a much higher risk to the economy.
So while there’s no reason to panic just yet, make sure you watch closely how fast consumer debt rises (right now: fast) and how many consumers are struggling to pay their debt (right now: a small but growing group). Because if the economy sputters and inflation keeps revving, things could turn a lot faster than you might think.
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