Despite record-high credit card balances, the typical U.S. consumer appears to be weathering the financial landscape with relative stability. While major household costs continue to strain many families, particularly those with lower incomes, the overall economy remains robust, fueled by consumer spending. Earnings growth has outpaced the rise in debt, suggesting that borrowers are managing their financial obligations more effectively.
Navigating the Evolving Economic Landscape
Credit Card Balances Surge, but Delinquencies Slow
U.S. consumers collectively owe a staggering $1.17 trillion in credit card debt, a new record according to estimates from the Federal Reserve Bank of New York. However, the data suggests that "rising debt burdens remain manageable" for the typical consumer. This finding may come as a surprise to some, given the economic concerns that were a driving factor in the recent election.The growth in credit card delinquencies has slowed, falling from 2.43% in the third quarter of last year to 2.34% in the same period this year, according to a report from the credit rating agency TransUnion. This improvement can be attributed, in part, to the robust earnings growth that has outpaced the rise in debt.Incomes Outpacing Expenses, Easing Debt Burdens
Earnings growth has averaged 6.2% per year since the pandemic began, compared to a 4% annual increase in the cumulative debt balance. As a result, the debt-to-income ratio among U.S. consumers has steadily declined during the post-Covid recovery, from 86% in 2019 to 82% today.This dynamic has left the median-income household financially better off than before the pandemic. The lowest average salary that Americans will accept from employers reached a new high of $81,822, the New York Fed reported this spring, putting pressure on many employers to offer competitive compensation.Shifting Spending Patterns and Inflation Dynamics
Retail sales rose by 0.4% in October, a solid stretch of spending heading into the busy holiday shopping season. Hourly earnings also increased by 0.4% last month, outpacing the inflation rate, which has not exceeded the pace of wage growth since January 2023."When inflation was rising at a faster rate, and expenses were increasing more quickly than household incomes, oftentimes it was debt that bridged that gap," said Greg McBride, chief financial analyst at Bankrate. "Now that inflation pressures have moderated, prices are still going up, but they're not going up as fast, and incomes are once again going up at a faster rate than expenses."Uneven Impacts and Demographic Disparities
The New York Fed report highlights the uneven distribution of debt and incomes across the population. While aggregate measures suggest overall improvements, the data also raises questions about the effects of persistent debt on households of different means in an economy defined by vast wealth inequality.The report notes that delinquency rates remain elevated despite the slowdown, a fact that is still causing stress for many borrowers. Additionally, lenders have increasingly tightened standards for mortgages toward older, higher-income borrowers with better credit scores, reflecting who has access to credit in the first place."Lower-income borrowers bearing credit card and auto debt look very different than higher-income households with larger mortgages," the New York Fed researchers added. This underscores the need to consider the nuances of individual financial situations when assessing the broader economic landscape.