- Americans have been saving less and spending more.
- That’s partially due to inflation woes, but spending on travel and recreation still remains high.
- Experts recommend that you keep your debt total low before a possible recession.
The job market is strong, but a recession this year is still not out of the cards.
Sasan Goodarzi, the CEO of Intuit, a business software company, told Insider that this means Americans should pay close attention to what they’re doing with their money, because too much debt can limit your financial options during a recession.
Americans were doing remarkably well financially for much of the pandemic. They paid off a record $83 billion in credit card debt in 2020, and four million fewer people had debt in collections in 2021 than in 2019. That’s largely due to an unprecedented boon in cash from stimulus checks and other pandemic aid along with reduced spending amid the pandemic. But with the economy open and help from the government at an end, excess savings are depleting, and consumers don’t seem interested in watching their spending.
Inflation has been eating into Americans’ wallets for the last two years, but it’s not the only reason savings are falling. Spending has remained strong overall, especially for in-person services that were especially constrained during the worst of the pandemic, said Goodarzi.
“Coming out of the pandemic, we see that consumers are spending less on goods and more on recreational services such as restaurants, travel, movies, and museums,” he said. “Demand for these types of recreational services remains strong.”
“We’re also starting to see some of the good behaviors developed during the pandemic, like paying down debt and consumers increasing their credit score, start to erode a bit,” he said.
Americans stashed away 2.4% of their savings in November, according to the Bureau of Economic Analysis, following a 2.3% savings rate in October. That’s far below the savings rate of 12.9% in November 2020 in the middle of the first Covid winter, and below an average of 6.3% prior to the pandemic, according to S&P Global Market Intelligence.
“Americans may say they are worried about inflation, but they are still out shopping, which keeps the economy growing for another quarter,” Christopher Rupkey, chief economist at FWDBONDS, told Reuters in October.
Higher spending and lower saving is starting to impact people’s credit.
“We’ve seen credit scores decline by ~8 points throughout 2022, and average credit card balances are up ~14% since March 2022 when the Fed first hiked rates,” Goodarzi said, “both indicating that consumers are beginning to fall behind financially.”
In general, financial experts recommend tackling as much of your debt as possible in anticipation of a recession. You’ll have more credit available in an emergency, you could avoid having to pay higher interest rates, and you may not have to find other avenues of credit, Katherine Salisbury, co-founder of Qapital, a popular finance app, told CNBC last year.
Lower and middle-income consumers should be especially wary
Goodarzi said that consumers with credit scores between 600 and 659 are carrying the highest debt balances, about $8,000 on average. Credit bureau Experian defines a score of 580 to 669 as “fair,” and most Americans fall somewhere between 600 and 750.
“This follows the trend that middle-class families are being pinched the most,” he said.
It’s the financial throughline of the pandemic — inflation has been hurting everyone but the country’s wealthiest, and on the eve of a possible recession, it’s lower and middle-income people who should be most cautious about the debt they’re accruing.
“Lower-income consumers have largely depleted their excess savings and are now relying more on credit cards,” Goodarzi said, adding that they “have begun to dial back on spending, and it’s clear that inflation is impacting them the most.”