
Consumers bolster spending figures but carry more debt

As we talked about on Thursday’s show, retail sales for the month of December were super strong, especially on goods like cars, electronics and furniture. One data point we didn’t get into is that more people used credit cards and buy now, pay later programs to fund those purchases. Non-housing debt, which includes credit card debt, has hit a record high, according to the New York Federal Reserve.
This story begins with a familiar narrative: the tale of two households. On one side, you have lower-income Americans relying more on credit cards to pay for essentials like groceries and gas. And then, there is the other half.
“Spending is being driven by upper-income households,” said Ted Rossman, a credit card analyst at Bankrate.
Rossman said this is usually the case but is especially true now. People who own their homes have had their finances buoyed by rising property values and low mortgage rates they locked in a few years ago. Meanwhile, unemployment is low.
“And even if it doesn’t feel great that inflation is gobbling up a lot of your wage gains, at least there are wage gains,” said Rossman.
All in all, Rossman said the debt-to-asset and income ratios are looking safe.
Despite that, nearly half of Americans carry month-to-month credit card debt. And, interestingly, a growing number of those people are upper-income households, said Atif Mirza, senior vice president of digital insights at VantageScore.
“The rate of growth in delinquencies for high-income consumers were much faster than the lower income consumers,” said Mirza.
Higher-income consumers aren’t just increasingly spending more — they’re increasingly paying off less.
“This is the time to make your debts smaller, not to expand your debt levels,” said Odysseas Papadimitriou, CEO of Wallethub. “And unfortunately most people use the good times to expand the debt levels.”
Lifestyle creep is real. Papadimitriou said some of the habits people formed since the pandemic — traveling and shopping and dining out — have stuck. And he doesn’t think those habits will change soon.
“So the question is not whether we’re gonna reach a breaking point, the question is when we will reach that breaking point,” said Papadimitriou.
The breaking point? When the job market goes south, and people can’t afford to keep spending.
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