While lawmakers continue to hold marathon meetings to reach a deal on hiking the debt limit, another debt crisis is looming in the United States.
A New York Federal Reserve report shows that the credit card debt of Americans stood at a whopping $986 billion — just a few billions short of the $1 trillion mark — as of March 31, 2023.
But this insanely high debt level has another layer to it.
Credit card balances remained flat in the first three months, indicating that US households depended on their credit cards for their daily spending.
In the US, household expenditure through credit cards rises during the holiday season, which coincides with the last month of the year. In the subsequent months, households usually focus on reducing their debt burden through repayment.
However, 2023 has turned out to be an anomaly as US households began feeling the pinch of rising inflation and the adverse impact of a slowing economy.
Ballooning household debt
The typical US consumer culture of ‘buy first, pay later’ has been helping households to ward off immediate expenditure. But this has also increased the debt burden to record levels each year.
The report states that aggregate household debt rose $148 billion in the first quarter of 2023 to reach $17.05 trillion.
The debt burden on US households is unlikely to go down this year, courtesy of the slower wage growth compared to inflation. According to the US Department of Labour Statistics, real average weekly wages (inflation-adjusted) declined by 0.6 percent between April 2022 and April 2023.
A 2022 survey by Bankrate recorded 55 per cent of employees stating that their incomes did not keep pace with the rising costs of goods and services. Though slightly better in 2023, the inflation situation is still at elevated levels. This means that individuals will likely take solace in credit to make their payments.
The ballooning debt on households is a bad omen for the US economy. Rising household debts contributed to a recession in 2008-09. By the end of 2008, US household debt hit $12.68 trillion after an eight-year-long housing boom. But once the housing bubble burst, debt levels declined dramatically, voluntarily and involuntarily.
“While part of this reduction stemmed from a historic increase in consumer defaults and lender charge-offs, particularly on mortgage debt, other factors were also at play. Households actively reduced their obligations during this period by paying down their current debts and reducing new borrowing,” a 2013 Federal Reserve of New York report read.
A major red flag that banks will face in 2023 is debt delinquency, a scenario when individuals delay their debt repayments. As of March 2023, the overall delinquency rate remained low by historical levels, at 2.6 per cent. However, the share of debt turning delinquent — loans not paid for over 30 days — is rising for most loan types, including credit cards.
But will we see a massive decline in household debt levels, like between 2009 and 2013? Only time — or a recession later this year — will tell us.
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