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A Closer Look: The U.S. Economy – The Great Spending Split
by Haley Sienkiewicz, ITR Economics
What you need to know: While consumers are on solid footing overall, there is an evident divide between two groups based on credit card activity.
Our outlook for macroeconomic growth through at least 2027 rests on a solid consumer. Stable consumer financial footing is fortified by rising US Real Personal Incomes and a generally limited pool of available workers. This is not to say there are no cracks emerging in consumers’ financial foundation. There are cracks, but they are longer-term cracks that we are expecting to widen as we get closer to the depression of 2030–36. US Personal Savings as a Percentage of Disposable Personal Income sits below long-term levels as consumer spending grows. Leaner savings today will put consumers in a more vulnerable spot in the future. Luckily, in aggregate, consumer debts are manageable relative to incomes. Peeking beneath that aggregate number, disparate trends are forming in consumer spending behavior. Specifically, a divide is evident in the US Share of Consumer Credit Card Accounts Making the Minimum Payment and Accounts Making the Full Balance Payment. The shock of the COVID environment (low interest rates, restrained consumer spending due to lockdown, and a surge in stimulus and unemployment benefits) led to more people paying higher than the minimum payment and more paying off the full balance in 2021. The share of consumers making only the minimum payment has been generally rising since 2022. It is important to note, however, that excluding the COVID shakeup of consumer behavior and balance sheets, the long-term trend for this metric is one of rise. So, we are returning to the preCOVID norm of consumers revolving their credit at higher and higher rates. On the other hand, the US Share of Consumer Credit Card Accounts Making the Full Balance Payment is rising mildly, but it remains below the 2022 peak.
Those who are struggling to make full payments are likely to continue to feel stretched at elevated interest rates. In summary, the divide between these two types of consumers continues to widen. What does this mean for consumers as a whole? Potentially not much from a macroeconomic perspective, as when taken together and alongside other leading indicators, the consumer base is chugging along fine and continuing to increase spending. The question then becomes: Will a weakened bottom brick of vulnerable consumers lead to economic collapse? The answer is very likely no, as those paying off their balance in full are the likely drivers of economic growth and investment. This is corroborated by sizeable savings levels of the top 20% of earners compared to the bottom 20%; the bottom 20%, when accounting for debt, has a negative savings rate. This group of consumers’ debt load makes them more likely to be in the minimum payment camp. While the rise in US Share of Consumer Credit Card Accounts Making the Minimum Payment is concerning, this trend is not new, but is something to keep an eye on. In short, we acknowledge and sympathize with those who are struggling to keep up financially in an era of elevated inflation and interest rates. At the same time, we urge businesses not to misconstrue that pain as evidence of imminent economic collapse. Businesses that cater to lower-income demographics, however, might see a change in consumer spending patterns, and may notice consumers searching for lower cost alternatives or the best deal. For those businesses that cater to customers who tend to own homes with low fixed interest rates and/or have stock portfolios or other means of capitalizing on the surge in corporate profitability post-COVID, days are brighter. Knowing your customer base is always key, but it is especially so in an era of a bifurcated consumer base within the US economy.
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