Are Americans Tapped Out? Consumer Borrowing Tanked in September


Mike Maharrey Mike Maharrey

Mike Maharrey

November 18th, 2024 Comments

We keep hearing that the economy is "robust" and gliding to a soft landing, but there are cracks in the foundation if you care to look closely enough.

American consumers have continued to spend over the last two years despite the stranglehold of price inflation. On the surface, this seems like a bullish indicator. But when you dig into the spending patterns, you discover that Americans blew through their savings and ran up massive credit card bills to sustain their spending spree.

And now it appears consumers might be pushing up against their borrowing limits.

The increase in consumer debt has slowed to a crawl, with both credit card spending and borrowing for big-ticket items tanking. This may indicate that Americans are close to being tapped out.

That's bad news for an economy relying on borrowing and spending to keep churning.

Total consumer debt rose by a rather modest $6 billion in September, a 1.4 percent annual increase, according to the latest data from the Federal Reserve

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Americans now owe just over $5.1 trillion in consumer debt. 

The Federal Reserve consumer debt figures include credit card debt, student loans, and auto loans but do not factor in mortgage debt. When you include mortgages, U.S. households are buried under a record level of debt. As of the end of the third quarter, total household debt stood at $17.94 trillion.

Credit card spending tanked in August and remained muted in September. Revolving credit, primarily made up of credit card balances, rose by $1.1 billion, a 0.9 percent increase. Americans owe just under $1.36 trillion in revolving debt.

The double whammy of rising debt and interest rates exacerbates the debt problem. The average annual percentage rate (APR) currently stands at 20.35 percent, with some companies charging rates as high as 28 percent. That's only slightly down from the record high of 20.79 percent set in August.

Rates don't seem to be coming down much despite the Federal Reserve's recent rate cuts. According to an ABC News report, while the Fed has dropped the benchmark rate by 75 basis points, credit card companies are charging a higher margin "to weather default risk, cover overhead costs and recoup profits, experts added."

"Credit card rates are high, and they're staying high," Bankrate analyst Ted Rossman told ABC News.

That's more bad news for consumers already burdened by high prices and big credit card balances. 

This double whammy is taking its toll. According to New York Fed Q3 data, "Aggregate delinquency rates edged up from the previous quarter, with 3.5 percent of outstanding debt in some stage of delinquency." It characterized delinquency rates as "elevated."

This underscores the fundamental problem of running an economy on credit. It’s expensive, and credit cards have an inconvenient thing called a limit.

Non-revolving debt, primarily reflecting outstanding auto loans, student loans, and loans for other big-ticket durable goods, increased by 1.6 percent in September. Non-revolving debt has increased at a relatively tepid pace of under 2 percent for most of the year as consumers cut back on big-ticket spending in order to cover the increasing costs of day-to-day necessities.

There was an acceleration in non-revolving debt in July and August, likely reflecting student loan balances as students prepared for the fall semester.

Before the pandemic, revolving credit growth averaged 5 percent. 

As credit card balances max out, more and more Americans are turning to their home equity to fill the gap. HELOC balances increased by $7 billion to reach $387 billion in Q3, representing the tenth consecutive quarterly increase since Q1 2022.

Joe Biden, Jerome Powell, and the talking heads on corporate media can brag all they want about the "strong economy," but Americans have been borrowing to buy it. They may have reached their limit, and that's bad news for an economy that thrives on debt.

Mike Maharrey

About the Author

Mike Maharrey

Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.