America's relentless spending has kept the economy motoring. But it's starting to worry some observers.
Chicago Federal Reserve President Austan Goolsbee said Friday that while consumer debt levels aren't yet "especially" high, the Fed is still concerned about the rate of consumer delinquencies, or missed or late payments on expenses such as auto loans, credit card bills and rent.
"If the delinquency rate of consumer loans starts rising, that is often a leading indicator for, 'things are about to get worse,'" he said at a moderated panel hosted by the Society for Advancing Business Editing and Writing.
Americans are already struggling to keep up with their credit card payments. Credit card debt rose $143 billion during the fourth quarter of 2023 from the year before, according to data from the New York Fed. The rate at which credit cards and auto loans are transitioning into delinquency continued to top pre-pandemic levels. Delinquency transition rates rose for all debt types excluding student loans.
"The pickup in credit card debt and delinquencies is consistent with the idea that consumers — particularly those [within] the bottom of the income and wealth distributions — are running out of surplus savings and turning back to credit to finance their spending," wrote Evercore ISI in a Monday note.
Strong consumer spending has buoyed the US economy through the Fed's aggressive hiking cycle that has brought interest rates to a 23-year high. Economists say a strong economy, a solid job market and growth in household income has helped support consumers and makes a mass retrenchment in spending this year unlikely.
But that doesn't mean consumers are infallible. Lower-income Americans have been hit harder than their higher-income counterparts, turning to eating at home, searching for deals and dialing back their spending to ease the pain of persistent inflation and high rates.
Economists say that Fed officials look closely at Americans' ability to make their payments. If consumer spending were to weaken considerably, that would be a blow to the economy, which has managed to weather sky-high rates without tipping into a recession. A marked slowdown in spending could, in turn, further complicate the Fed's thinking on where interest rates go next.
Corporate earnings this week have underscored this mixed picture of American consumers: They're resilient, but they're tightening their purse strings. Spending is expected to moderate at least somewhat, despite holding up well.
"The lower-income consumer in the US is stretched, is strategizing a lot to make their budgets get to the end of the month," said PepsiCo Chief Executive Ramon Laguarta in the company's earnings call on Tuesday.
Investors will get their next look at the consumer's health on Thursday morning, when the Commerce Department releases its first estimate of first-quarter gross domestic product. Consumer spending accounts for about two-thirds of the US economy.
The Atlanta Fed projects that GDP grew at a 2.7% clip during the first three months of 2024, which would mark a slightly cooler but still solid rate.
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