A Bleak Picture

 

 

   

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Overall, total consumer debt reached $17.8 trillion in the second quarter of 2024, up 9.86% over last year. Total consumer debt includes student loans, personal loans, and mortgage debt.

There are increases across the board...

• Average federal student loan debt stands at $37,853, up 2% over 2023
• The average personal loan debt per consumer was $19,402 in 2023, a 6.3% increase over 2022
• Average mortgage debt clocked in at $244,498 in 2023, up 5% over 2022
• Auto loan debt reached an average of $23,792 per consumer in 2023, up 5.2% over 2022.

These figures paint a bleak picture of American consumer finances.

If spending slows or hits a wall, the economy could follow suit, creating a vicious feedback loop.

The Federal Reserve has attempted to mitigate economic downturns in the past by cutting interest rates to stimulate spending. That's one reason they just cut the fed funds rate 50 basis points.

But in a landscape overrun with record consumer debt and rising interest rates, cuts may no longer be effective. If consumers are already maxed out on credit, lower rates may not translate into increased spending. Instead, consumers may prioritize paying down existing debt over new purchases, further slowing economic activity.

With the average APR for credit cards now exceeding 21%, many consumers are likely to experience significant financial strain, limiting their willingness or ability to spend. In such a scenario, even aggressive monetary policy by the Fed may fail to stimulate the economy effectively.

After all, it took years for consumer spending to come back after the Fed cut rates to near-zero after the 2008 Financial Crisis.

The current state of consumer debt poses a significant risk to the broader economy. With credit card debt at an all-time high, rising delinquency rates, and a heavy burden of overall consumer debt, the foundations of economic growth are increasingly precarious.

Should consumer spending hit a wall, the repercussions could be huge.

We could see an economic downturn and market correction that the Fed will be powerless to fix.

S. Gilani