A recession may be needed to slow the consumer

Sometimes life would be easier if everyone was more like Keanu Reeves:

But other times you just can’t help it:

I am choosing door #2 today. I’m sorry, Keanu.

I’ve seen a few variations of this chart going around for a few weeks:

At first glance, it seems scary and even obvious.

During the pandemic, the personal savings rate skyrocketed while credit card debt plummeted. Now the opposite is happening as savings rates fall while credit card debt rises again.

The consumer is screwed. Case closed. Right?

I regret to inform you that this is a first degree misdemeanor.

First things first, we are comparing a stock vs. a flow on this chart. Excuse me for the nerdy terminology, but stock refers to a cumulative number at any given time (in this case, credit card debt), while flow refers to an amount that is measured over time. time (in this case, the personal savings rate).

So we’re measuring apples and oranges here.

And since we’re measuring stock versus flow, these numbers don’t really tell us anything unless you have a relevant benchmark to compare them to.

It’s obviously not a good thing that the personal savings rate has fallen so much, but there are a number of reasons that may help explain why it’s happening.

Inflation is a logical explanation. People are saving less because costs have risen so much.

But it’s also true that American households accumulated excess savings during the pandemic because they were spending less money and many people received government support. Now they are spending more to make up for lost time.

The Wall Street Journal estimates that there is still something in the range of $1.2 to $1.8 trillion of excess savings (i.e., savings above what households would have been expected to save had the pandemic never occurred):

The experts’ best guess is that it will take 9-12 months for people to overspend these savings.

It’s not good for people to save less, especially if we’re going into a recession next year, but there’s still a lot of dry dust on household balance sheets.

And if inflation continues to fall, that could help drive the savings rate back up.

Increasing credit card debt doesn’t feel so good either, but this one really isn’t out of the ordinary if you zoom out a bit.

The New York Fed produces a quarterly report on the composition of household debt over time showing that things are not as bad as they seem:

The bulk of consumer debt has always come in the form of mortgages, which make up more than 70% of total debt. Credit card debt at the end of the third quarter was only 6% of total household debt.

Do you know what the historical average of credit card debt is in relation to total debt?

is 6%.

So we’re right on average. In fact, credit card debt has been relatively stable at around 6% since 2010. It hit 10% of total debt in 2003.

And if you look at credit card levels from behind, you can see that we are now surpassing pre-pandemic levels:

Credit card debt is by far the worst type of debt out there. But people still aren’t stuffing themselves with high-interest-rate debt.

Just look at credit card delinquency rates:

They’re falling.

Or how about the foreclosure and bankruptcy data, still well below historical norms:

Consumer debt as a percentage of disposable income is rising, but remains relatively low by historical standards:

The good times for consumer spending will not last forever.

Eventually, people will spend their surplus savings from the pandemic. Probably many have already done it.

But us love spend money in this country. I can’t see people just spending their savings and then sitting idly by.

Things have stagnated a bit in recent months, but even when adjusted for inflation, retail sales data remains well above the pre-pandemic trend line:

My guess is that credit card debt will continue to charge more once all the excess savings have been spent.

As long as the job market remains strong, most households will be fine going to restaurants, taking a trip to Disney, and filling up airports.

It might take a recession to slow down the consumer.

Other reading:
Has the consumer ever been more prepared for a recession?

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