Inflation, recession and living on “borrowed money” as credit soars

Recession fears and price pressures haven’t tamed Americans’ urge to splurge.

Driving the news: Credit-card balances are defying the gravitational pull of stubborn inflation and slower growth. They account for about $890 billion of Americans’ staggering $16 trillion in household debt.

What’s happening: Spending on experiences, like travel and entertainment, has supplanted physical goods like clothing and home items as the purchases of choice for consumers.

“If your costs begin to exceed your income. What do you do? You look for a relief valve through borrowed money,” investor Peter Tarr said in a Twitter thread this week.

• Credit is “a smaller option for liquidity, there ‘just in case’ or to ease some costs. Then its loans / refinancing. Home sales etc,” Tarr noted.

Zoom out: For spendthrift consumers, a saving grace has been rising wages that, while failing to keep pace with surging inflation, are still rising at the fastest pace in decades.

• They’re also bolstered by an unusually strong jobs market that has kept the unemployment rate below 4%, and given job seekers a lot of leverage.

What we’re watching: Credit card issuers are leaning into Americans’ hunger for debt, primarily by offering travel-related bonuses and cash back on purchases, according to data from Wells Fargo.

• The survey found that 45% of Americans with rewards credit cards “rely on their credit card rewards to help offset some of the cost of everyday purchases.”
• Mastercard and Visa both of which reported booming earnings, even as retailers like Walmart, Target and Best Buy warned that soaring costs were leading to tons of excess merchandise.

What they’re saying: “No one can live on borrowed money forever,” Ron Hetrick, senior economist at Lightcast said this week, connecting the worker shortage to rising credit debt.

• “There are 22 million people out of the labor force who are using credit cards to pay for their expenses. In a labor market with 10.7 million job openings, those potential workers can go a long way to addressing the talent shortage we’re seeing across the board,” he added.

Our thought bubble: If the jobs market stays relatively buoyant (July’s blockbuster report suggests it will) and wages keep rising (ditto), most consumers will likely find a way to keep the bills paid.

• Still, with weak U.S. data heightening recession chatter, none of the above is a given. And regardless, carrying billions of dollars worth of revolving debt as growth sinks and inflation soars simply isn’t sustainable.