The American Economy's Credit Card Roulette

Start with the positive news.

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Household finances are still in pretty good shape even after more than a year of excruciating price hikes, rising borrowing prices, and a constant barrage of catastrophic predictions about the status of the American economy.

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According to revised GDP data that will be presented later this morning, the economy expanded by 2.9% in the fourth quarter. According to the Federal Reserve's Open Market Committee minutes, which were issued on Wednesday, because of rising wages and declining unemployment, "credit quality of households also remained good, on balance."

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The bad news is that "some symptoms of degeneration" have been noticed.

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Even though they are still at pre-pandemic lows, FHA mortgage delinquencies are starting to trend upward. A "rapid return" to pre-Covid rates of unpaid vehicle and credit card payments is possible, according to the New York Fed, especially among younger borrowers. As we near 2023, bank officials surveyed by the Fed anticipate a rise in the number of borrowers delaying or skipping loan payments.

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Household perceptions of the economy are impacted by such minute fissures in the foundation. Pessimism begins to spread as more households begin to feel the pain from inflation and the loss of any financial cushion they may have.

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According to a recent survey by the financial services company Bankrate, 36 percent of U.S. adults believe their credit card debt now outweighs their emergency reserves. In the twelve years of polling, that is a record high.

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With significant and sustained inflation, savings have been depleted, according to Bankrate Senior Economic Analyst Mark Hamrick, who spoke with MM. "These data points are indications of features of financial fragility." It is anticipated to likely continue to be drawn down much more.

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"The combination is clumsy. And it's definitely led to a lot of people turning to credit card debt," he continued.

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Another confusing element is that the aggressive rate increases the Fed has implemented in an effort to combat inflation have been accompanied by rising credit card borrowing charges. Anyone who has relied on plastic to keep up with escalating costs will be more negatively affected if they miss their bill payment deadline.

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While some measurements have weakened, household finances have remained healthy overall, according to the Fed minutes, Biden officials are careful to point out.

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Many economic indices, such as the more than 500,000 new jobs generated only last month, the lowest unemployment rate in 53 years, and real incomes higher than they were seven months ago, all point to a robust labor market and a robust economy. On a number of important measures of economic security, households are still in a stronger position than pre-pandemic levels. Also, as we move from a quick rebound to stable and steady growth, as we have long emphasized, we can anticipate a cooling off period, according to a statement from White House Assistant Press Secretary Michael Kikukawa.

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Any slight increase in delinquencies, especially when compared to historically low levels, is probably due to more people getting credit who were previously shut out of the credit markets.

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How long will this issue only affect subprime borrowers is the question.

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According to Gregory Daco, chief economist at EY Parthenon, the amount of disposable income used by households to pay off loans is "expected to surpass and remain significantly greater than pre-pandemic levels" as interest rates rise. A "serious financial strain on households and consumer spending capability" will result from that.