As pandemic-related stimulus initiatives diminish, consumer debt has surged along with delinquency rates on credit cards. However, the head of President Joe Biden’s economic advisers, Jared Bernstein, noted that Americans’ debt is simply "returning" to pre-pandemic levels.
New York Federal Reserve data revealed a 4.7 percent rise in U.S. credit card balances to $48 billion in the third quarter, marking a record high of $1.08 trillion since 2003. A 3.7 percent increase in disposable income over the last year is cited as a factor supporting consumer spending.
“Some of what you’re calling ballooning is really a return to kind of normal levels of credit card delinquencies or debt levels,” Bernstein said on Fox News Sunday.
Around 40 percent of Americans have depleted their pandemic savings to cope with growing bills. Experts worry that more consumers are resorting to credit cards and additional debt for daily expenses.
There is a growing worry surrounding the surge in the adoption of "buy now, pay later" services. These services commonly enable consumers to split purchases into four installments, usually without fees unless a payment is skipped.
According to Adobe Analytics, consumers used installment loans worth $67 billion during this year's Cyber Monday, marking a 16 percent surge compared to 2022. Meanwhile, Wells Fargo estimated consumer spending via these products at approximately $46 billion for the year.
Economists caution that the consumer debt forecast could take a more somber turn. As banks started lowering credit limits and shutting down dormant lines of credit, consumer debt might not serve the pivotal role in propelling spending in 2024, as it did previously, according to Tim Quinlan, a senior economist at Wells Fargo.
Wider ballooning debt trend
This trend aligns with the broader financial landscape highlighted by an October analysis from the Penn Wharton Budget Model (PWBM).
As of September 30 last year, the total "debt held by the public" amounted to $26.3 trillion, approximately 98 percent of the country's projected GDP. This figure excludes the amount the federal government owes itself from the total outstanding debt of $33 trillion.
This substantial debt load underlines the challenge of mounting debt pressures on both consumer spending and the overall fiscal health of the country.
According to the analysis, the U.S. has approximately 20 years to alter the trajectory of the size of its debt before a form of default becomes unavoidable.
The analysis by Jagadeesh Gokhale and Kent Smetters indicates that the U.S. debt should ideally not surpass 200 percent to avoid severe consequences.
However, a more practical threshold stands around 175 percent, contingent on the implementation of necessary fiscal corrections. Currently, it is at about 98 percent.
"Under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation)," the report said.
"Unlike technical defaults where payments are merely delayed, this default would be much larger and would reverberate across the U.S. and world economies."
The growing national debt is a major concern on Capitol Hill. Both Republicans and Democrats agree it needs to be controlled but disagree on how to manage it.
A bipartisan deal suspended the debt limit until January 2025, initially set at $31.4 trillion but later reaching $32 trillion in the same month.
"The national debt just exceeded $100,000 per citizen. This should send a message to the White House that this reckless federal spending is at a breaking point," Rep. John James, R-Mich., said earlier in December when the debt passed the threshold.
Echoing PWMB's suggestions, Darrell Spence, an economist at a U.S. asset management firm cautioned that the rapidly increasing debt could force the government to hike taxes and trigger additional bond sell-offs.
It could also push the Fed to implement higher interest rates, which would conflict with the central bank's objectives of lowering rates as inflation cools down.