Title: The Decline in Credit Card Spending Raises Concerns about US Consumer Financial Health
Introduction:
The decline in credit card spending in the US is causing worry over the financial health of consumers and the prospects for holiday sales. With record-high interest charges, cardholders are facing a burden of debt and strained finances due to rising interest rates. The total credit card debt has surpassed $1 trillion for the first time, indicating the gravity of the situation.
The Impact of Rising Interest Rates:
Unlike other types of consumer credit, credit cards have varying terms and are among the first debts affected by rising interest rates. The Federal Reserve reported that the average annual interest rate on credit card balances reached a record high of 22.8 percent in August, significantly up from 16.3 percent a year ago. As a result, consumers are expected to pay an additional $40 billion in interest on their credit card balances next year compared to the previous year.
Factors Affecting Credit Card Spending:
Citigroup economist Robert Sockin mentioned that credit card spending weakness was observed in all sectors, indicating an overall decline. The recent data reveals that credit card spending at retailers fell by nearly 11 percent in the last month. Bank of America economist Shruti Mishra highlighted a slowdown in spending after Labor Day, following a strong summer period. The rise in interest rates has also been cited as a reason for the decline in credit card spending.
Consumer Outlook and Concerns:
Citigroup’s Chief Executive Jane Fraser warned of “cracks” appearing in the health of US consumers and suggested that the excess savings from the Covid years may be running out. Additionally, top retail executives have expressed concerns that rising interest rates could dampen consumer spending for the remainder of the year. Household budgets are still under pressure due to increasing costs for gas, utilities, and borrowing.
The State of Consumer Debt and Default Rates:
While credit card spending has slowed down, default rates are not significantly higher than before the pandemic. The strong job market in the US has provided support to consumers for now. However, there is growing financial strain on lower-income consumers who rely more on revolving credit, as well as banks tightening lending standards. Economists are worried about the overall growth in credit card debt, especially among the lowest income levels.
Economic Factors Influencing Consumer Spending:
EY-Parthenon has forecasted a moderate 3 percent rise in retail sales for the upcoming holiday season due to high inflation, higher interest rates, and moderate income gains. This projection is lower than the 5.8 percent pace of last year and significantly below the post-pandemic surge of 13.2 percent in 2021.
Implications of the Decline in Credit Card Spending:
The decline in credit card spending reflects the financial strains faced by lower-income consumers and the tightening of lending standards by banks. This trend raises concerns about the overall financial health of consumers and the potential impact on holiday sales. Additionally, it highlights the need for consumers to manage their credit card debt effectively and consider alternative financing options.
Summary:
The decline in credit card spending in the US has raised concerns about the financial health of consumers and holiday sales. Rising interest rates have resulted in record-high interest charges, increasing the burden of debt for cardholders. While total credit card debt has exceeded $1 trillion, default rates remain relatively stable. However, the decline in credit card spending indicates growing financial strain, particularly among lower-income consumers. The forecast for moderate retail sales during the holiday season suggests that high inflation, higher interest rates, and moderate income gains are influencing consumer spending patterns. It is crucial for consumers to manage credit card debt effectively and explore alternative financing options to maintain financial well-being.
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A decline in credit card spending is raising concerns about the U.S. consumer’s financial health and holiday sales prospects as cardholders face record interest charges.
The decline in card spending comes as consumers’ finances are strained by rising interest rates and the burden of debt, particularly when it comes to borrowing from credit card. This debt has grown over the past year and recently exceeded $1 trillion for all Americans for the first time.
“Credit card spending was weak in September, and what’s remarkable is that this weakness cut across all sectors,” said Citigroup economist Robert Sockin.
Credit cards, unlike mortgages and other types of consumer credit, tend to have varying terms and are among the first types of debt on which consumers feel the impact of rising rates.
Friday, the Federal Reserve reported that the average annual interest rate consumers pay on credit card balances hit a record high of 22.8 percent at the end of August, up from 16.3 percent a year ago. a year.
As a result, U.S. consumers are expected to pay up to $40 billion more in interest next year on their credit card balances than they were a year ago, according to WalletHub, which tracks cards credit and consumer finances.
“We have heard about a slowdown in the credit card market,” said Odysseas Papadimitriou, chief executive of WalletHub. “People who have credit card debt carry it longer and don’t pay it off as much.”
Credit card spending at retailers fell nearly 11 percent last month, Citi reported this week, based on the bank’s customer data. The decline, the fifth straight month of “spending deceleration,” was the largest of the year so far.
“After a strong summer, spending appears to have slowed after Labor Day,” Bank of America economist Shruti Mishra wrote in a research note released Thursday.
Citigroup Chief Executive Jane Fraser warned last week that “cracks” were appearing in the health of U.S. consumers. “I think some of the excess savings from the Covid years are about to run out,” Fraser said, speaking on CNBC.
Top retail executives also warned that rising interest rates could dampen consumer spending for the rest of the year. Walmart Chief Executive Doug McMillon said in August that rising gas, utility and borrowing costs would take a toll on consumers.
“Household budgets are still under pressure,” McMillon said.
While there has been a marked slowdown in credit card spending, default rates, while rising, are not much higher than they were before the pandemic began. And American consumers appear, at least for now, supported by a strong jobs market. The U.S. Department of Labor reported Friday that employers, collectively, increased their payroll by a higher than expected number of 336,000 positions in September.
“Continued strength in the labor market, including strong gains in employment and real wages, has supported spending against expectations of an imminent slowdown in activity,” noted JPMorgan’s Michael Hanson.
“While consumer health will ultimately depend on the health of the labor market, household balance sheets remain strong. »
Consumers spent savings accumulated during Covid lockdowns, when interest rate payments were suspended, and the government introduced direct payments and other stimulus measures to combat the economic impact of confinements.
But since March 2022, the Fed has quickly raised rates to combat persistent inflation. The policy rate now hovers between 5.25 and 5.5 percent, its highest level in 22 years. Officials are still mulling the idea of an additional quarter-point rate hike this year before pausing for most of 2024.
Overall consumer spending, which includes rent and other purchases that consumers don’t typically make with a credit card, continues to rise, albeit at a slower pace. Some economists say the decline in credit card spending reflects growing financial strains on lower-income consumers, who rely more on revolving credit, as well as banks’ tightening of lending standards.
“The overall growth in credit card debt is a topic that concerns us,” Sockin said. “I think we are starting to see increasing financial stress at the lowest income level. »
EY-Parthenon cited “high inflation, higher interest rates and moderate income gains,” in forecasting a moderate 3 percent rise in retail sales for the November and December holiday season. That would be down from last year’s 5.8 percent pace and well below 2021’s post-pandemic madness of 13.2 percent.
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