A Macro View: Lurking beneath the surface – American’s Increasing Debt
The holiday season is a time when many individuals reach for their credit cards to buy that perfect gift for their families and friends. However, many people get caught up in the spirit of the season and spend beyond their budget. This holiday season, Americans plan to spend an average of nearly $862 for holiday gifts, up from approximately $752 in 2016, and the highest level since 2007.1 About 25% of shoppers will take at least three months to pay off their debts.2
Americans have now surpassed $1 trillion in outstanding revolving credit card debt, which is the highest amount since 2008, when the Great Recession began. 3 Furthermore, approximately 38% of all American households carry credit card debt, and those who carry a balance from month to month have an average of $16,048 outstanding.4 Although the makeup of the average American’s debt has changed since the financial crisis, what has not changed is the many individuals and families that are living paycheck to paycheck. The markets and the economy have continued to improve while American wages have not. When you adjust for inflation, salaries are only 10% higher than they were in 1973, an annual real wage growth of approximately 0.2%.5 It’s no wonder that the average American takes on increasingly more debt when their wages have been mostly flat for decades. At the same time, they see skyrocketing costs for education and healthcare.
The debt situation may not be nearly as dire compared to its height during the Great Recession, but we must remember the lessons of carrying too much debt. During the financial crisis, we saw that high debt levels made the economic downturn more profound and more prolonged. Given that recessions are inevitable, and that we have not experienced one since the financial crisis, Americans’ increased indebtedness is a cause for concern. Currently, the consumer debt service ratio remains low and manageable, but what happens when interest rates normalize, inflation increases, and the next recession ensues?
Given that the American consumer is the backbone of growth in the United States, the increase in debt will likely put our country in another precarious situation when the next crisis strikes. The combination of lack of wage growth and increased costs that millions of Americans face has exacerbated the debt situation for many. While we see corporate profits and executive pay continue to grow, wages for the vast majority of Americans have been stagnant for decades. Most of the credit cards are at a variable interest rate, which means that as the Federal Reserve increases the federal funds rate to more normalized levels, people carrying credit card debt will face increasingly larger payments just to service it. During the Great Recession, people felt this pain through the low-interest variable rate mortgages that many took out so they could afford their dream homes, and we saw how that ended—many families became bankrupt and homeless. Let’s hope that Americans remember the past and do not continue down the road of insolvency.
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