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US consumer debt soared to new heights in the run-up to the holiday season

By Alicia Wallace, CNN

New York (CNN) — US consumers did not rein in their spending this past holiday season, and now have near-record-breaking debt balances to show for it, according to new Federal Reserve data released Monday.

Consumer borrowing spiked by $23.75 billion in November, more than doubling economists’ expectations for a $9 billion increase and sending outstanding credit balances north of the $5 trillion mark for the first time on record, the Fed’s latest Consumer Credit report showed.

The monthly increase during the critical holiday shopping month was driven by higher rates of revolving credit (which includes mostly credit cards), which soared by nearly $19.5 billion — the third-highest monthly increase on records that go back to 1943.

Higher revolving debt balances can be a reflection of population growth and increased card usage, as well as higher rates of economy-powering consumer spending. The report does not show how the credit is being used or whether the outstanding balances are being paid off before interest starts to accrue.

However, the sharp increase in credit balances is starting to be a cause for concern, Ted Rossman, Bankrate senior industry analyst, told CNN via email.

“Credit card usage and Buy Now, Pay Later usage seemingly surged during the holidays, on top of already hefty debt loads,” Rossman said. Now, delinquencies are at their highest level since 2012.

“That seems to debunk the ‘normalization’ thesis offered by banks and card issuers — as in, delinquencies were artificially low during the pandemic because of stimulus and people spending less, so we knew they would rise back to 2019-ish levels,” he added.

“But now they’ve surpassed that,” he said.

Americans are feeling more optimistic about inflation slowing down

While high inflation has clouded Americans’ views of the overall economy and sapped away their earnings, people have continued to spend robustly on essentials as well as plenty of discretionary expenses and experiences.

However, there are indications that pace of spending might start to peter out somewhat.

Consumers’ median spending growth expectations dropped in December to 5.02%, the lowest since May 2021, according to a separate report released earlier on Monday by the Federal Reserve Bank of New York.

Despite the slight retreat in spending expectations, the New York Fed’s latest Survey of Consumer Expectations showed improvement in Americans’ feelings of optimism about the overall economy, and especially inflation.

US consumers’ expectations for inflation one year from now have fallen to the lowest level in three years, according to the report.

Median inflation expectations declined across all three time horizons tracked in the survey — one, three and five years ahead — with the nearer-term categories landing at levels not seen since 2020.

The Federal Reserve, which is in the throes of a yearslong campaign to rein in inflation, closely watches consumers’ inflation expectations because they can be self-fulfilling prophecies: If consumers believe that prices will remain high, they might spend more now and demand higher wages. In return, businesses might raise prices to accommodate higher demand and wages.

During December, the one- and three-year ahead median expectations both fell by nearly 0.4 percentage points to 3.01% (lowest since December 2020) and 2.62% (lowest since June 2020), respectively; the five-year ahead expectations dropped to 2.54% from 2.68%, New York Fed data shows.

“The fact that consumers expect inflation to continue to come down is a good thing,” Rossman said. “Consumer sentiment has been in the doldrums for years, largely due to inflation gobbling up Americans’ wage gains and masking how strong the job market and other aspects of the economy have been.”

Consumers expect weaker wage gains but are feeling ok about overall finances

Last month, while holding interest rates steady for the third consecutive meeting, Fed officials signaled that a trio of rate cuts could be in store for 2024. Lower interest rates could feed through the economy to make it a little easier to buy a home, a car or finance another big-ticket purchase.

At the same time, it also means that the United States will move past “peak savings rates,” RSM economist Joe Brusuelas told CNN at the time.

The December 2023 survey showed that the mean probability of savings accounts carrying higher interest rates shrank more than 3 percentage points to 25.92%, the lowest since November 2020.

Still, expectations about credit access and overall financial health trended to the optimistic side, the New York Fed survey showed.

Respondents were considerably less pessimistic about how their current household financial situation stacked up to the year before, as well as what’s to come in the year ahead. The share of respondents who reported their current financial situation was “somewhat” or “much” worse than a year ago fell to 38.75%, the lowest level since February 2022; and the 25.24% share who said their year-ahead outlook will be somewhat or much worse is the lowest since September 2021.

Although projected earnings growth dropped to 2.45%, the lowest since April 2021, consumers remain quite upbeat about the US labor market, which has maintained remarkable resilience despite the Fed’s intense rate-hiking actions.

The mean probability that the unemployment rate would be higher in a year’s time dropped to 37.02%, the lowest since March 2022.

Later this week, the Bureau of Labor Statistics will release two closely watched inflation reports, the Consumer Price Index and Producer Price Index for December.

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