Economic Growth and Consumer Debt: A Delicate Balance

The economy grew at a rate of 4.9% in Q3, the fastest in two years, as a resilient consumer continued to spend. As pandemic-era savings have been spent and savings accounts are now below pre-pandemic levels, consumer spending is being funded by income and debt. Never underestimate the American consumers' willingness to spend all the money they have and all they can borrow.

The Federal Reserve Bank of New York released its Q3 Household Debt and Credit Report. Here are some highlights:

• U.S. household debt increased by 1.3% to $17.29 trillion in Q3.
• Credit card borrowing rose by 4.7% to $1.08 trillion, marking a $154 billion annual increase, the largest since 1999. Notably, much of this debt carries an interest rate above 20%.
• Strong consumer spending and real GDP growth contributed to a surge in credit card balances.
• The housing market felt the impact of higher borrowing costs, with mortgage rates reaching decade highs.
• Overall, debt delinquency rates have started to climb, now at 3%.
• Delinquency rates are particularly higher among borrowers in their thirties.
• As the pandemic pause on repayments concluded, student loan debt saw an increase of $30 billion to $1.6 trillion. Total student loan debt can increase when the accrual of interest outpaces borrower payments and the amount of new debt taken on exceeds the amount being repaid.
• Mortgage originations totaled $386 billion, with mortgage balances rising by $126 billion to $12.14 trillion.
• Continuing a trend since 2011, auto loan balances increased by $13 billion to $1.6 trillion.

Consumer spending accounts for 70% of U.S. economic activity. As consumers reach their borrowing limits, and a larger portion of personal income goes to debt service, less is available for spending. As consumer activity slows, some businesses may need fewer employees, potentially increasing unemployment and further slowing the economy. 

When the economy starts to slow or even contract, it's easy to get caught up in the doom and gloom. But slowdowns are just a part of how the economy breathes — in and out, boom and bust, expansion and contraction. Instead of getting swept up in the fear, we can look at it as a heads-up, a chance to get our ducks in a row. It's like seeing storm clouds on the horizon; you've got time to prepare. So, when consumer spending dips and things look a bit dicey, it's really an opportunity. We can use it to tighten our budgets, pay down debts, or maybe reallocate our investments. This way, we're not just reacting when things get rough; we're ready for it and prepared to take advantage of opportunities on the other side. And there will be opportunities on the other side in the next phase of the economic cycle.