The Resilient Engine of the U.S. Economy Could Stall

Consumer spending typically has made up over 70% of the U.S. economy and historically has been a significant driver of growth. At this juncture, the consumer balance sheet appears healthy after many years of deleveraging¹ after the global financial crisis. However, we see two key risks to consumer spending heading into year‑end: rising consumer credit card debt and delinquencies and the resumption of student loan repayments.

Consumer debt level appears manageable…

We believe that consumer balance sheets remain healthy and are supportive of spending fundamentals. Despite headlines about high debt levels, total and liquid assets as a share of liabilities are both high for U.S. households. Unlike the 2000s, when consumers were over‑levered relative to their assets, today’s consumers do not need to deleverage. Checking account balances also remain well above pre‑pandemic levels.

Additionally, debt servicing costs remain low relative to history, even with rising interest rates, and U.S. consumers’ financial obligations remain manageable relative to disposable income. Mortgage debt represents a sizable proportion of total household debts, and many borrowers were able to lock in low mortgage rates in recent years. This has helped insulate a large portion of debt from higher interest rates.

…but credit card and auto loans are showing signs of stress

While our baseline expectation is for the U.S. consumer to remain on a steady upward trajectory, we see the recent worsening in debt quality as reason for some concern. For instance, credit card and auto loan delinquencies have risen recently, particularly among younger borrowers. While overall delinquencies are still below pre‑pandemic levels, the acceleration could be a sign that consumers are feeling the stress of rising interest rates and the squeeze to disposable incomes from high inflation. The recent rise in consumer bankruptcy filings could be another sign of stress.

Credit conditions for consumer loans have also tightened significantly in the past year, meaning they are less likely to fund large purchases with favorable loans. Banks face higher funding costs and heightened regulation to retain capital following the regional banking crisis in March 2023. According to the Fed’s Senior Loan Officer Opinion Survey on Bank Lending Practices, the proportion of banks less willing to lend to consumers has risen to historic highs.

Key risks to the consumer outlook

Following the U.S. Supreme Court’s ruling on student loan debt forgiveness, the resumption of student debt payments for millions of borrowers starting in October is likely to present a key headwind to consumer spending in the fourth quarter of 2023 and into 2024. We anticipate that student loan payments will have a larger impact on younger borrowers, who are already displaying pockets of weakness in the form of increased delinquencies on credit cards and auto loans.

Finally, the excess savings accumulated during the height of the pandemic across developed economies has been dwindling. While there is some debate about exactly when the excess savings will be completely depleted, most analyses indicate this buffer will have run out by the end of 2023. Without the savings buffer to smooth over the shocks of rising prices, interest rates, or the resumption of student loan repayments, the U.S. consumer could be under increased pressure.

T. Rowe Price cautions that economic estimates and forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual outcomes could differ materially from those anticipated in estimates and forward-looking statements, and future results could differ materially from historical performance. The information presented herein is shown for illustrative, informational purposes only. Any historical data used as a basis for analysis are based on information gathered by T. Rowe Price and from third-party sources and have not been verified. Forecasts are based on subjective estimates about market environments that may never occur. Any forward-looking statements speak only as of the date they are made, and T. Rowe Price assumes no duty to and does not undertake to update forward-looking statements.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of October 2023 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

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