According to the Bank of America Institute, around 29% of households that earn less than $50,000 per year used credit cards to finance their spending, which could be a factor that could push the U.S. into recession.
Curt Long, chief economist at the National Association of Federally-Insured Credit Unions (NAFCU) told CNBC: “Consumer spending represents more than half of the economy, so if consumer spending is strong, that alone is, generally speaking, enough to keep the economy from slipping into a recession.”
A recession has been anticipated for months given ongoing high inflation (4.9%) and high interest rates, but the U.S. is still not officially in a recession partly due to strong consumer spending.
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To offset inflation, the Federal Reserve has hiked interest rates ten times throughout the past year however there is a possibility of a pause on further rises, which the Fed chair Powell voiced in an announcement.
Despite a high cost of living and slow wage growth, households are still spending more rather than saving money, according to the U.S. Bureau of Economic Analysis, the saving rate had dipped to 4.6% in February, far below the historic average, around 8%. This dip in savings is a significant change from the high savings seen during the pandemic, when the average person saved around 25% of their income, according to Pew Research Center data.
With rising prices and consumer spending at a high level, low earners are reaching for credit cards. The Bank of America Institute data reveals around 29% of households, earning less than $50,000, use a credit card for their spending. And according to the Federal Reserve Bank of New York, credit card debt in 2023 rose to a record high.
Anna Zhou, an economist at the Bank of America Institute advised that middle-class Americans “rely more on the tax refund to finance their spending,” but tax refunds are down by 8% compared to this time last year according to the IRS, so “a lower refund really has some negative impact on their spending.”
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