CNN

American spending has kept the economy going since the pandemic

Nov 26, 2023, 2:20 PM

Barbie dolls are displayed for sale ahead of Black Friday at a Walmart Supercenter on Nov. 14, in B...

Barbie dolls are displayed for sale ahead of Black Friday at a Walmart Supercenter on Nov. 14, in Burbank, California. (Mario Tama/Getty Images)

(Mario Tama/Getty Images)

 (CNN) — Not even two years of soaring prices and mounting interest rates have stopped Americans from opening their wallets and tapping their credit cards.

The consumer’s willingness to keep paying high prices has kept the US economy relatively strong, but that attitude could soon be shifting. Some experts think the combination of high housing costs, rising credit card debt and shrinking savings could mean the end of post-COVID splurges, maybe even as soon as this year’s holiday shopping season.

“Headwinds are going to eventually force the consumer to buckle, and I think that we’re going to see consumers have to pull back on spending for a quarter or two,” said Erik Lundh, a principal economist at The Conference Board.

Here are the pressures consumers are facing that could cause a spending slowdown.

Housing costs are the highest in 40 years

Buying and paying for a house costs Americans more now than at any point in almost four decades. Thanks to strong demand and a limited supply of new homes – even as mortgage rates have more than doubled in the past year – it now takes nearly 41% of the median household’s monthly income to afford the payments on a median-priced home, according to research from Intercontinental Exchange (ICE). The last time housing payments cost that much was in 1984.

Housing payments are only part of the problem. The Freddie Mac 30-year fixed mortgage rate as of Nov. 16 was 7.44%. A new homebuyer in October 1981 carried an 18.45% mortgage rate, or 55% of the median income. But the median home price that month was proportionally much lower than today – $70,399 ($231,902 in 2023 dollars), or 3.69 times the median income. The median home price over the past two years has ranged from roughly five and a half to six times the median income – $445,567, as of October. That ratio is higher than at any point since ICE began collecting data, including during the housing bubble of the mid-2000s.

Americans are carrying more debt than ever

Inflation has also impacted spending on major purchases. Balances on non-housing loans have more than doubled since 2003, totaling roughly $4.8 trillion, according to data from the New York Federal Reserve. More than $500 billion of that debt accumulated just in the past two years – a bigger jump than any other two-year period since 2003, the earliest year available.

Some of that debt comes from skyrocketing car prices, but credit card balances are growing the fastest of all – roughly 34% from the fall of 2021. Student loan and car loan balances have grown by 10% or less over that same period of time, although student loan debt could begin to climb now that payments have resumed.

One important caveat is that this data is not adjusted for inflation, and personal incomes have also grown since the pandemic. The national average wage rose by more than $8,000 from 2020 to 2022, according to the Social Security Administration. That’s the largest increase over two years since 1982.

Keeping up with high prices not only has led to more credit card debt, but also more consumers are falling behind on the payments. During the third quarter, 5.78% of credit card balances became seriously delinquent (90 days or more behind on payments), accounting for the largest share of new serious delinquencies. Since the first quarter of 2022, the rate of newly serious delinquent credit card debt has risen roughly 90%.

Student loan debt previously saw the largest rates of newly seriously delinquent balances until the federal government paused payments in March 2020 because of the COVID-19 pandemic.

COVID-era windfalls have dwindled

A study released by the San Francisco Federal Reserve earlier this year revealed one important clue as to why consumers are continually willing to pay higher prices: High levels of excess savings.

Households were saving hundreds of billions more dollars per month in 2020 and 2021 compared to the pre-pandemic trend, according to the SF Fed. One big reason those piggy banks got so full was the “refinancing boom” that occurred during that time of historically low mortgage rates. From the second quarter of 2020 through the end of 2021, 14 million mortgages were refinanced, resulting in an estimated $430 billion of equity being extracted through either lower monthly payments or cash-outs, according to New York Fed research.

“Under lockdowns and the worst of COVID-19, consumers were afraid to go out,” Lundh said.

That meant all that money that would have been spent on goods and experiences pooled up in people’s piggy banks instead.

As the pandemic waned, consumers unleashed a pent-up demand for experiences denied by COVID, Lundh said. And for the past two years, Americans have been spending all of those savings, even as prices and interest rates have climbed higher and higher.

During the pandemic, consumers accumulated $2.1 trillion in excess savings. As of June 2023, they’ve spent $1.9 trillion of it, the SF Fed concluded.

“The consumer is going to have to take a breather for a little bit,” Lundh said.

And that would mean Americans may be forced to finally pull back on their post-COVID spending spree.

“At a certain point, this debt becomes unsustainable, and there’s no more savings left,” Lundh said. “And that’s what we expect probably to happen to the US consumer, towards the end of this year and into early 2024.”

KSL 5 TV Live

CNN

Alexander Smirnov leaves court in Las Vegas on February 20, 2024. (CNN)...

Cheri Mossburg and Hannah Rabinowitz, CNN

Ex-FBI informant Smirnov will remain in jail while he awaits trial, judge rules

Ex-FBI informant Alexander Smirnov will remain in jail while he awaits trial, a federal judge in California ruled Monday.

5 hours ago

Kenneth Mitchell, here in 2018, has died. (Gabe Ginsberg/Getty Images via CNN Newsource)...

Megan Thomas

Kenneth Mitchell, ‘Star Trek’ and ‘Marvel’ actor, dead at 49

Kenneth Mitchell, an actor who appeared in the series "Star Trek: Discovery" and Marvel's "Captain Marvel," has died. He was 49.

6 hours ago

The United States Supreme Court building is seen as in Washington, U.S., in October 2023.
Mandatory...

Brian Fung, CNN

Supreme Court hears landmark cases that could upend what we see on social media

The US Supreme Court is weighing whether states such as Texas and Florida should have the power to control what posts platforms can remove from their services.

6 hours ago

Kathy Brandel and Ralph Hendry, from Virginia, were spending the winter cruising the Eastern Caribb...

Sharif Paget, Chris Boyette and Polo Sandoval, CNN

2 Americans believed dead after yacht allegedly hijacked in Grenada

The family of two Americans who may have been killed after prison escapees allegedly hijacked their yacht in Granada are clinging to hope the couple might be found alive.

24 hours ago

Placards bearing portraits of Israeli hostages held in Gaza are lifted during a rally calling for t...

Camila DeChalus, Sam Fossum and Alex Marquardt, CNN

US says ‘understanding’ reached at Gaza hostage talks but negotiations continue

Negotiators have come to an “understanding” on the broad contours of a potential deal to release hostages held by Hamas in exchange for a temporary ceasefire in Gaza, White House National Security Advisor Jake Sullivan told CNN Sunday.

1 day ago

Migrants walk along the US-Mexico border wall after crossing the Rio Grande into El Paso, Texas, fr...

Priscilla Alvarez, Camila DeChalus and Alison Main, CNN

Migrant crisis looms over governors’ gathering at the White House

The record level of migrants arriving at the US-Mexico border loomed over a gathering of governors at the White House this weekend, revealing how the issue has become prominent in states nationwide and across the political spectrum.

1 day ago

Sponsored Articles

Modern chandelier hanging from a white slanted ceiling with windows in the backgruond...

Lighting Design

Light Up Your Home With These Top Lighting Trends for 2024

Check out the latest lighting design trends for 2024 and tips on how you can incorporate them into your home.

Technician woman fixing hardware of desktop computer. Close up....

PC Laptops

Tips for Hassle-Free Computer Repairs

Experiencing a glitch in your computer can be frustrating, but with these tips you can have your computer repaired without the stress.

Close up of finger on keyboard button with number 11 logo...

PC Laptops

7 Reasons Why You Should Upgrade Your Laptop to Windows 11

Explore the benefits of upgrading to Windows 11 for a smoother, more secure, and feature-packed computing experience.

Stylish room interior with beautiful Christmas tree and decorative fireplace...

Lighting Design

Create a Festive Home with Our Easy-to-Follow Holiday Prep Guide

Get ready for festive celebrations! Discover expert tips to prepare your home for the holidays, creating a warm and welcoming atmosphere for unforgettable moments.

Battery low message on mobile device screen. Internet and technology concept...

PC Laptops

9 Tips to Get More Power Out of Your Laptop Battery

Get more power out of your laptop battery and help it last longer by implementing some of these tips from our guide.

Users display warnings about the use of artificial intelligence (AI), access to malicious software ...

Les Olson

How to Stay Safe from Cybersecurity Threats

Read our tips for reading for how to respond to rising cybersecurity threats in 2023 and beyond to keep yourself and your company safe.

American spending has kept the economy going since the pandemic