Sometimes life would be easier if everyone looked more like Keanu Reeves:
But other times, you just can’t help yourself:
I choose door #2 today. Sorry, Keanu.
I’ve seen a few variations of this chart do the rounds for a few weeks now:
At first glance, this seems scary and even obvious.
During the pandemic, the personal savings rate soared while credit card debt plummeted. Now the opposite is happening as savings rates fall while credit card debt is back on the rise.
The consumer is screwed. Case closed. Right?
I’m sorry to inform you that this is a first degree felony.
First, we are comparing a stock to a flow in this chart. You’ll excuse me for the corny terminology, but stock refers to a number that’s accumulated at a given time (in this case, credit card debt) while flow refers to a quantity that’s measured over time (in this case, the personal savings rate).
So we’re measuring apples and oranges here.
And since we measure stocks versus flows, those numbers really don’t tell us anything unless you have a relevant benchmark to compare them to.
Obviously, it’s not a good thing that the personal savings rate has fallen so much, but there are a number of reasons that may help explain why this is happening.
Inflation is a logical explanation. People are saving less because the costs have gone up so much.
But it’s also true that American households accumulated excess savings during the pandemic because they were spending less money and many people received government assistance. Now they are spending more to make up for lost time.
The Wall Street Journal estimates that there is still something in the $1.2 to $1.8 trillion range of excess savings (i.e. savings beyond what households would have had to save if the pandemic had never happened):
Experts’ best estimate is that it will take 9 to 12 months for people to spend those excess savings.
It’s not great that people are saving less, especially if we enter a recession in the coming year, but there’s still plenty of dry powder left on household balance sheets.
And if inflation continues to fall, this could potentially help drive the savings rate up.
Rising credit card debt doesn’t feel so good either, but this one really isn’t out of the ordinary if you zoom out a bit.
The New York Fed produces a quarterly report on the composition of household debt over time which shows that things are not as bad as they seem:
The bulk of consumer debt has historically taken the form of mortgages, which account for over 70% of total debt. Credit card debt at the end of the third quarter was only 6% of total household debt.
Do you know what the historical average of credit card debt versus total debt is?
It’s 6%.
So we are right on average. In fact, credit card debt has remained relatively stable at around 6% since 2010. It reached 10% of total debt in 2003.
And if you look at credit card levels from the beginning, you can see that we just broke through pre-pandemic levels:
Credit card debt is by far the worst form of debt there is. But people aren’t gorging themselves on high-interest debt yet.
Just look at the delinquency rates on credit cards:
They fall.
Or how about data on foreclosures and bankruptcies – still well below historical norms: 
Consumer debt as a percentage of disposable income is increasing but still relatively low by historical standards:
Good times for consumer spending won’t last forever.
Eventually, people will spend their excess savings from the pandemic. Many have probably already done so.
But we to like spend money in this country. I don’t see people just spending their savings and then sitting on their hands.
Things have stabilized a bit in recent months, but even if you adjust for inflation, the retail sales data remains well above the pre-pandemic trend line:
My guess is that credit card debt will continue to grow once all the excess savings have been spent.
As long as the job market remains strong, most households will be able to eat out, take a trip to Disney and fill airports.
It may take a recession to slow down the consumer.
Further reading:
Has the consumer ever been better prepared for a recession?
#recession #slow #consumer