The Surprisingly Healthy U.S. Consumer

Despite what you've probably heard

Despite the worst inflation in four decades and a gloomy economic outlook, U.S. consumers appear to be in good financial health (at least for now).

Lately, however, I’ve seen a lot of articles that suggest otherwise. In just the past week: More Auto Payments Are Late, Exposing Cracks in Consumer Credit and Americans in Their 30s Are Piling on Debt in the Wall Street Journal, America’s Credit Card Roulette Economy in Politico, Credit card debt hit a record high. Here’s one way to pay it down in the Washington Post, and US credit card debt at record high: New York Fed Household Debt report in USA Today.

A lot of these stories make nuanced points that are at worst technically accurate (and in many cases actually accurate), but if you just skim the headlines, you’d think the sky is falling.

Current economic data paint a much more upbeat picture of the U.S. consumer. The Fed released new data on delinquency rates last week, and both Americans and American businesses are having a relatively easy time paying back their debt. Delinquency rates are lower than they were before the pandemic in every category, and while credit card delinquency rates are inching higher, they’re still low by historical standards.

This data only goes through the end of 2022. Is it possible that consumers have fallen apart in the first two months of 2023? Sure, but there’s not much in the more real-time data to support that. The personal saving rate, a measure of the share of disposable income that consumers are saving, has risen in four straight months and is now at its highest level since January 2022 (though it’s still well below the pre-pandemic level), and retail sales, a measure of how much consumers are spending, rebounded sharply in January. As you can see below, consumer spending is way higher than before the pandemic even after adjusting for inflation.  

I know, the idea that most Americans are holding up decently well seems improbable, especially when you look at how inflation has impacted everyday purchases. A shopping cart full of groceries that cost $100 at the start of the pandemic now costs about $124, and that $100 energy bill back in February 2020 is now a $135 energy bill. A $1,000 couch? As of January 2023, that costs about $1,200. A used car that cost $20,000 three years ago now costs $27,440.

Why Consumer Finances Are Holding Up

First, Americans saved an unprecedented amount of money during the early months of the pandemic. With nowhere to go, nothing to spend on, and pandemic-relief funds bolstering incomes, what else could we do?

In April 2020, we saved 33.8% of disposable income, well above the previous record high of 17.3% in May 1975, and that rate stayed elevated through the middle of 2021. This led to a huge accumulation of savings.

According to this analysis from the Fed, the stock of excess savings (i.e., how much more Americans saved during the pandemic than they would have without the pandemic) peaked at nearly $2.3 trillion—trillions with a “t”—in the third quarter of 2023. Those excessive savings are now being depleted and, as of the second quarter of 2022, were down to $1.7 trillion, but that’s still a massive glut of excess savings.

So these excess savings are being drawn down, but they’ve definitely helped cushion the blow of rampant inflation.

Second, income has kept pace with inflation, at least for a large segment of the population. Economywide prices are up 16.0% since the start of 2020, and average hourly wages are up 16.2%. As you can see below, inflation has accelerated since 2021 while wage increases have stayed pretty steady, but big picture, the average earner has about the same buying power they did three years ago.

Third, virtually everyone who wants a job has one. The unemployment rate is currently 3.4%, the lowest rate since 1969, and initial claims for unemployment insurance, our most real time indicator of the labor market, remains incredibly low as of the third week of February.

Why the Vibes and the Data don’t Match

Part of this is the outlook. A majority of economists continue to forecast a recession over the next 12-18 months. The longer inflation sticks around, the higher the Fed will raise interest rates and the longer they’ll keep them there, and that’s going to eventually take a toll on the economy. If you’re in an airplane that’s nose-diving toward a fiery explosion, it’s hard to focus on how nice your first-class seat is.

There’s also the possibility that the cracks in consumer health are only surfacing for those with low credit scores. For instance, one of those WSJ articles at the top of this post is about how the share of subprime auto debt 30 or more days delinquent rose to 9.3% at the end of 2022, the highest rate since the start of 2010.

The idea that those with low credit scores are suffering at the moment checks out. Car and home prices increased pretty sharply over the past few years, and higher interest rates, which are even higher for those with bad credit scores, make debt harder to pay down. This is bad. Those with lower credit scores who are struggling deserve our sympathy, and this is likely where the first cracks will appear if conditions worsen.

But subprime lending is, in many ways, at historic lows. (According to the Consumer Financial Protection Bureau, “subprime” refers to a credit score below 619.) In the fourth quarter of 2022, just 15.3% of auto loans (by value) went to borrowers with a credit score below 620, the lowest share since the data series began in 1999.  

The share of new mortgages that are subprime has also remained extremely low; during the fourth quarter of 2022, just 3.0% of new mortgages by dollar value were subprime, lower than at any point from the start of the data series to the end of 2019.

(If you want to see the debt data referenced throughout this section, most can be found here.)

Another fact commonly used in these gloomy articles is the massive increase in overall debt that occurred during 2022. Another WSJ article from last week said:

American millennials in their 30s have racked up debt at a historic clip since the pandemic. Their total balances hit more than $3.8 trillion in the fourth quarter, according to the Federal Reserve Bank of New York, a 27% jump from late 2019. That is the steepest increase of any age group. It is also their fastest pace of debt accumulation over a three-year period since the 2008 financial crisis.

About 70% of that $3.8 trillion in debt is for mortgages, and those mortgages have disproportionately been taken out by buyers with good-to-great credit scores. The share of mortgages held by those in there 30s that became 90+ days delinquent in the fourth quarter of 2022 was lower than at any point between the start of the data series in 2000 and the start of 2021.

There’s also been a lot of talk in the news about the increase in credit card debt, which rose 15.2% during 2022. That sounds scarier than it is, though, because credit card debt actually declined pretty sharply during the pandemic. Compared to the first quarter of 2020, credit card debt has actually increased at a slower rate than most other forms of debt, and as mentioned above, credit card delinquency rates remain below the pre-pandemic level. In real terms (inflation adjusted), credit card debt is down since the start of the pandemic.

Big picture, there’s not much in the data to suggest that Americans are struggling to pay down their debt. It’s really the exact opposite; in many ways, the data look as good as they ever have regarding debt. For instance, 97.5% of all debt was current (i.e. not late) during the fourth quarter of 2022, the highest level since the start of the series in 2003. Just 1.4% of debt is more than 90 days late, also the lowest share on record.

Wrapping Up

If the U.S. consumer is doing so well, why is the economic outlook so gloomy? Conventional wisdom says it takes 12-18 months for interest rates to affect the economy (housing market aside), and we’re currently just 11 months out from the first rate hike. As those effects begin to hit, economic conditions should deteriorate, leading to a probable recession.

When that happens, there’ll be cracks in consumer health, and that will take the form of higher delinquency rates, lower retail sales, and a falling personal saving rate, among other indicators.

For now, at least, those cracks have yet to appear.

What’s Next

We’ll have our February Q&A post out soon and Week in Review, as always, on Friday. Those are just for paying subscribers. If that’s not you and you want it to be, just click this button.