American Households Are on the Brink of Ruin

U.S. households appear to have short memories when it comes to financial lessons learned from past crises. Despite the harsh lessons of the 2008–09 global financial crisis, many households in the United States are right now repeating the same mistakes.

Recent data reveals that personal consumption expenditures on goods surged by 3.8 percent in the fourth quarter, outpacing overall U.S. gross domestic product (GDP) growth of 3.3 percent. This trend is concerning, especially since it's not supported by rising income. In fact, personal spending grew at more than double the rate of personal income in 2023, according to the Bureau of Economic Analysis.

The surge in spending is fuelled by debt rather than increased income. Household debt hit a record high of $17.5 trillion by the end of 2023, a 24 percent jump from pre-pandemic levels in 2019. This debt includes mortgages, auto loans, student loans, and credit card balances. Notably, credit card balances increased by 4.6 percent in the fourth quarter, indicating that consumers are relying more on debt to cover everyday expenses.

Newly released credit card data also reveals a disturbing uptick in delinquencies among credit card holders, with one in twelve struggling to make payments—a level not seen since 2011, when unemployment was substantially higher.

What's particularly alarming is that while household debt has grown significantly since 2019, real personal income has only seen modest growth. This means households are more indebted relative to their income than before the recession induced by the lockdowns in 2020.

Further signs of financial strain include a decline in the personal savings rate and depletion of existing savings. The personal savings rate dropped from 5.3% in May to 3.9% in December. Aggregate personal savings have fallen by over 27% since December 2019, indicating that households are dipping into savings to meet their needs at never before seen levels.

The resumption of student loan repayments, following the end of the moratorium on federal student debt repayments in September 2023, has added to the debt burden for many families as well, with rising interest rates also increasing the cost of consumer debt service, with the average cost of credit card debt reaching nearly 28% in February 2024.

As the economy navigates through uncertain terrain, the repercussions of reckless spending habits are becoming increasingly apparent. With mounting debt levels and economic vulnerabilities, policymakers and individuals alike are urged to exercise caution to prevent a potential financial crisis.

The current situation reflects a dangerous cycle of indebtedness, exacerbated by unsustainable spending habits and reliance on credit. Funnily enough, this pattern resembles the broader economic policy approach infamously termed "Bidenomics," characterised by excessive spending and borrowing.

However, unlike (for a while…maybe) the government, households cannot indefinitely sustain such practices. Eventually, the consequences of overspending and accumulating debt will catch up with them, leading to financial hardship and a painful reckoning that will be felt across the whole economy and political spectrum.