E Economics

US Consumption Will Face Significant Headwinds From H2 2023

11 July, 2023
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US consumption is expected to face significant headwinds from the second half of the year, raising the risk of a recession. Excess savings depletion, a slowdown in consumer credit growth and the upcoming resumption of student loans’ payments should negatively affect US consumption in a context of rising interest rates and tightening credit conditions.



The Depletion of US Excess Savings

According to a recent Federal Reserve research paper, the COVID-19 pandemic has left an indelible mark on the global economy, prompting unprecedented fiscal measures to mitigate its impact. Among the notable consequences has been the accumulation of excess savings. However, recent developments indicate a significant shift in this landscape, with research suggesting a depletion of US excess savings from 1Q23. US excess savings grew rapidly, peaking in the third quarter of 2021, but subsequently declined at a faster pace. Consequently, the US currently faces a depletion of excess savings. The more accelerated drawdown of excess savings likely contributed to relatively stronger support for aggregate demand over the past year compared to other countries. However, the recent depletion brings forth uncertainties regarding the sustainability of US consumption growth.

Data Source: Federal Reserve

US Consumer Credit Growth Hit A Wall

Part of this depletion has was offset by a rise of US consumer credit. Yet, newly released data indicates that borrowing by US consumers experienced a significant slowdown in May, reaching the lowest level in over two years. According to the Federal Reserve’s report on Monday, total credit increased by $7.2 billion, marking the smallest growth since November 2020. Specifically, non-revolving credit, which encompasses loans for purposes like education expenses and vehicle acquisitions, decreased by $1.3 billion, marking the first decline since April 2020. On the other hand, revolving credit outstanding, which includes credit card debt, saw an increase of $8.5 billion. This increase, however, represents a deceleration compared to the substantial gains observed in the previous two months. Concurrently, it should be noted that the average interest rate on credit cards has surpassed 22%, reaching a new record high based on available data. Finally, credit conditions for credit cards also deteriorated significantly over the past few quarters.

Data Source: Federal Reserve

US Student Loans’ Payments Will Resume This Fall

Looking ahead, the finances of US households with student debt are poised to be strained further. More than 26 million Americans will resume student-loan payments this fall after a three-year pause. According to the NYT, “tens of millions of borrowers, who, according to the Federal Reserve, paid $200 to $299 on average each month in 2019, will soon face the resumption of a bill that is often one of the largest line items in their household budgets.”

Unfortunately, it seems that most of borrowers decided to increase spending rather than paying down other debts. According to researchers from the University of Chicago, instead of using the relief funds to reduce their existing debts, individuals who were eligible for the payment pause actually increased their borrowing by an average of 3 percent, equivalent to $1,200, compared to those who were not eligible. The additional income was often channeled into increased spending by making minimum payments on credit lines, a strategy that appealed to many individuals, especially during the early stages of the pandemic when interest rates were low.

Also of note, according to the Consumer Financial Protection Bureau, approximately 50% of borrowers who are set to resume their student loan payments have additional debts that have increased by at least 10% compared to their pre-pandemic levels.

The Risk of A Recession Is Gaining Traction

The depletion of excess savings in the US, coupled with the slowdown in consumer credit growth, signals a changing financial landscape. As the nation grapples with the resumption of student loan payments and the strain it will put on households, concerns over the sustainability of the support for aggregate demand increase. The borrowing behavior observed during the payment pause, where individuals increased their borrowing rather than paying down debts, raises further questions about financial stability. With interest rates on credit cards reaching record highs and additional debts increasing for many borrowers, the challenges ahead loom large raising the probability of a recession in the second half of the year.