Consumers: First they saved, then they spent and spent and spent some more

Debt rises and saving rate declines amid inflation and high interest rates

American consumers accumulated an extra $2 trillion in savings during the COVID-19 pandemic.

And then they went on a spending spree, whittling down their savings, racking up debt and helping fuel more than two years of inflation that the Federal Reserve is trying to tame by repeatedly raising interest rates.

“Consumer spending is above the path it was on before COVID. So it did kind of supercharge demand and we still haven’t gone back to normal spending,” said Henry Willmore, an economics lecturer in the University of Dayton School of Business Administration.

Credit: Alexis Larsen

Credit: Alexis Larsen

The personal saving rate skyrocketed from 9.3% pre-pandemic in January 2020 to an unprecedented 33.8% in April 2020 when people stayed home and squirreled away federal stimulus checks and enhanced unemployment compensation approved by Congress as COVID-19 swept the world.

That rate, which is the percentage of disposable income people save, spiked again, to 26.3%, with the final round of government stimulus checks in March 2021, and then declined to the current 4.6% in May, about half of what it was in 2019.

Prior to the pandemic, the highest recorded personal saving rate was 17.3% in 1975, according to this newspaper’s analysis of U.S. Federal Reserve Bank of St. Louis data dating to 1959.

“COVID scrambled the deck in terms of, even if overall spending had never been changed, the fact that at some point people couldn’t travel so they started spending their money on things they could order on Amazon or by catalog, manufactured goods,” Willmore said. “At other points those things became hard to get because of supply chain (issues) so people splurged on travel, which is what seems to be happening this summer.”

The credit card delinquency rate rose to 2.43% in January, after being below 2% for seven of the previous 12 quarters, the St. Louis Fed data show.

Total household debt increased by $148 billion, up 0.9%, to $17.05 trillion in the first quarter of 2023 and is a full $2.9 trillion higher than at the end of 2019, according to the Quarterly Report on Household Debt and Credit published by the Federal Reserve Bank of New York in May.

“The share of debt newly transitioning into delinquency increased for most debt types,” the report said. “Transition rates into early delinquency for credit cards and auto loans increased by 0.6 and 0.2 percentage points, following similarly sized increases for the past year. Delinquency transition rates for mortgages upticked by 0.2 percentage points.”

The delinquency transition rate for federal student loans was flat, thanks to a repayment and interest accrual pause put in place in 2020. But that expires in August, adding a fresh monthly bill for the approximately 43 million people who together owe $1.6 trillion on federal student loans. President Joe Biden’s effort to forgive up to $20,000 in student loan debt for people meeting income requirements was overturned by the U.S. Supreme Court in June.

Credit: Alexis Larsen

Credit: Alexis Larsen

Willmore said that resumption of student loan payments will have a negative effect on spending, particularly for younger households.

Consumer spending drives the American economy, so using interest rate hikes to slow spending risks raising unemployment and causing a recession. But if consumers keep spending at their current pace it will be harder for the Fed to reach it’s target of 2% inflation, and lead to more rate hikes, said Abbey Omodunbi, senior economist at PNC.

“Consumers are increasingly spending more on experiences and services and less on goods. Spending on interest-sensitive items like cars, housing and other big-ticket items will likely slow in the second half of the year as the impact of elevated interest rates continues to feed through the economy,” Omodunbi said.

“With higher debt levels and elevated interest rates, consumer spending will soften by late-2023, and this would most likely result in the economy entering recession by late-2023 or early 2024.”

Cutting back

For some people, coping with higher debt levels and inflation means doing some belt-tightening like cutting out extras, hunting for bargains and delaying large purchases.

But not everyone has spare money to use for extras like dinner out and vacations, so cutting those things isn’t an option. Lower income people also lost the pandemic-era expanded child tax credit and additional Supplemental Nutrition Assistance Program (SNAP) food benefits after Congress refused to renew those programs.

Fifty-two percent of adults surveyed said it would be very difficult or somewhat difficult to pay an unexpected bill of $1,000 right away, according to a Quinnipiac University survey released in June. Racial gaps were stark, with 40% of Black adults, 35% of Hispanic adults and 20% of white adults giving that answer.

For some people the monthly challenge is figuring out how to cover rent, pay utilities and buy food, which all cost more in these inflationary times, said Megan Goettemoeller, family stabilization and support case manager at Catholic Social Services of the Miami Valley.

“Literally they’re just trying to find enough money to make ends meet,” Goettemoeller said. “They’re trying to work as hard as they can. But their income isn’t sufficient enough or the business they are working at doesn’t have many benefits, so they have to put more money out of their own pockets for health care.”

Low income people struggle to afford child care, find reliable transportation to work and are at risk of becoming homeless if they can’t pay the rent and utilities, she said.

In the first six months of this year the Catholic Social Services Choice Pantry saw a 51 percent increase in the number of families seeking food, particularly after the SNAP benefit cuts, said Darrico Murray, program manager for mission services.

Credit: Photographer: Joseph D. Loy Sr.

Credit: Photographer: Joseph D. Loy Sr.

Through June, the pantry served 4,824 families, nearly as many as the 5,126 served all of last year, he said.

“I would say we need to figure out our food crisis. Our grocery stores are stocked but our consumers don’t have the money,” Murray said. “So people are turning more to pantries.”

Household debt

Willmore said one way to measure the pain of debt is looking at household debt service payments as a percentage of personal disposable income.

That percentage reached nearly 13.2% in October 2007 as the country hurtled toward the Great Recession, according to an analysis of Federal Reserve Bank of St. Louis data.

It slowly declined in subsequent years, reaching 9.74% in January 2020, just before the pandemic recession hit in February, and stayed below that level until hitting it again in October 2022, the data show.

Credit: Alexis Larsen

Credit: Alexis Larsen

Total household debt, the bulk of which is for home mortgages, rose steadily from 2003 until reversing course during the Great Recession, which lasted from Dec. 2007 to June 2009. Household debt began climbing again in 2014.

The personal saving rate also dwindled in the leadup to the Great Recession, staying below 4%, just as it did for most of last year.

With a high debt burden and a low saving rate before the Great Recession “households were so stretched and overextended by then, once the recession came in they just didn’t have a buffer,” Willmore said. “It makes a recession more severe.”

Willmore said households worked hard since then to improve their finances and coming into the pandemic recession were in far better financial shape than 13 years before.

“Looking at the data kind of puts a little bit of a corrective on the doom and gloom and the pessimistic views that are out there. It doesn’t look as bad as 2007. I’ve become a little more optimistic this year,” said Willmore, who like many economic experts is “on the fence” about whether the Fed’s effort to slow the economy will lead to a recession.

Strong economy

Fueling optimism is the enduring strength of the economy, even as people continue to struggle with price inflation that began rising in mid-2021 and hit a 40-year high last year.

Inflation declined in June to 3% year-over-year, the lowest level since March 2021, and monthly wage gains were higher than the monthly inflation rate, according to the U.S. Bureau of Labor Statistics.

Inflation in the 12-county Midwest region that includes Ohio was even lower, 2.4% year-over-year, the data show.

The labor market and job creation remain very strong, with the economy adding 209,000 jobs in June and unemployment down to 3.6.% nationally. June figures for Ohio are not available but the rate was 3.6% in May.

“With wage growth now trending higher than consumer inflation, consumption will have a demand-driven tailwind if households continue to maintain their spending habits at entrenched higher prices — which have induced rapid growth in high-interest consumer debt over the past two years,” said Kurt Rankin, senior economist at PNC. “And as long as consumers continue to spend, producers and retail businesses will be able to pass their still-rising labor costs onto their customers,”

Willmore thinks people are becoming more cautious.

“They know the Fed is pushing up rates and maybe the job market will not be quite as good in the future,” Willmore said.

Andy Platt, managing director at Northwestern Mutual-Dayton/West Chester, is seeing that caution with local clients.

“Our team spends a lot of time working with business owners on their financial plans for both their personal and business needs. We are consistently hearing a message of optimism, but a lack of clarity on what the next 6-12 months looks like in the economy,” Platt said. “This short-term lack of clarity is causing many of our clients to hold off on implementing any big changes or purchases.”

The Path Forward project seeks solutions to the most pressing issues facing our community. This two-day series examines the problem of rising consumer debt and declining savings and looks at what resources are available to help.

Part one: After saving an extra $2 trillion during the pandemic consumers are spending down savings and going into debt.

Part two: Local help available for people in debt and those trying to avoid it

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