Are U.S. Consumers Tapped Out?

February 16, 2023

Source: Federal Reserve Bank of St. Louis (U.S. Bureau of Economic Analysis) Source: Federal Reserve Bank of St. Louis (U.S. Bureau of Economic Analysis)

The U.S. personal savings rate, which measures personal savings as a percentage of disposable income, spiked during the pandemic as many Americans received stimulus checks, stopped commuting to work and spent less on entertainment and dining out. According to the U.S. Bureau of Economic Analysis, personal savings hit $4.85 trillion in the second quarter of 2020 and the personal savings rate was 33.8%. Since then, the personal savings rate for Americans hit a 17-year low in November 2022 by falling to 2.4%. As of December 2022, the rate had risen slightly to 3.4%.1

Personal savings have declined as the cost of goods and services are rising. During the past year, the cost of living has risen faster than income for most Americans, which has forced many to take on more debt to make ends meet. Rising interest rates are making debt more costly. Household leverage has risen as credit usage has increased, which may be a sign that some borrowers have exhausted their pandemic savings. Inflation is outpacing wage growth, which will make it difficult for some borrowers at the lower end of the credit spectrum to service their debt.

After a brief decline, American credit card debt is on the rise again.  Credit card debt for American consumers has been piling up, reaching $943 billion in January 2023. That’s a 14% year-over-year increase. Credit card balances now exceed their pre-pandemic levels, after sharp declines in the first year of the pandemic.2

Not only are credit card balances rising, interest rates have also been increasing — as the Federal Reserve (Fed) raised rates eight times in the past year in an effort to combat inflation. The Fed’s actions have pushed the average credit card interest rate on accounts incurring interest to 20.4% as of November 2022, according to the Federal Reserve Bank of St. Louis. This is the highest average rate since the St. Louis Fed began tracking such data in 1994.3

Credit cards are the most prevalent type of debt in the U.S. and there are more than 500 million open accounts. Half of all American adults have at least two cards, and 13% have five or more cards. While balances are rising, performance remains steady.  According to the most recent data from the Federal Reserve Bank of St. Louis, the 30-day delinquency rate for credit card payments rose modestly from 1.85% to 2.08% in the third quarter of 2022.4

However, delinquency rates are still near their historic lows. Before falling under 2% in the first quarter of 2021, delinquency rates had never dropped below that number since tracking began in 1991. Delinquencies reached a peak of 6.8% in 2009 during the Great Recession.

Key Takeaway

Higher prices have taken a significant bite out of household income and, as a result, consumer spending on an inflation-adjusted basis has stagnated. This trend is expected to continue, with further monetary tightening, resulting in diminishing consumer demand. Collateral performance will likely weaken this year as inflation inhibits borrowers’ ability to repay their loans. Stress is occurring in subprime and near-prime borrowers in households that are tapped out. Consumers will likely continue to prioritize payments based on future utility.

While the consumer still faces challenges, spreads on some securitized consumer loans look attractive. Asset-backed securitizations may benefit from short deleveraging structures and solid credit enhancement levels. I prefer shorter-duration, high-quality paper tied to prime borrowers. Wider spreads and higher all-in yields are attractive at the top of the capital stack.



1Source: St. Louis FED- Personal Saving Rate; as of 1/27/23

2Source: St. Louis FED- Consumer Loans: Credit Cards and Other Revolving Plans, All Commercial Banks; as of 2/10/23

3Source: St. Louis FED- Commercial Bank Interest Rate on Credit Card Plans, Accounts Assessed Interest; as of 1/9/23

4Source: St. Louis FED-Delinquency Rate on Credit Card Loans, All Commercial Banks; as of 11/23/22

Tags: Credit cards | Debt | Interest Rates | Federal Reserve | Credit card debt | Inflation

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The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.

This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.  This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

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