Economic growth surprised to the upside in 2023, driven by greater than expected growth in consumer spending, supported by a strong labor market and robust income growth. However, the ability of consumers to continue to drive growth in the year ahead remains in question, particularly with credit card balances reaching new record highs, indicating consumers may have more limited ability to tap credit to fuel spending as they have.
Rising credit card debt may limit spending for more heavily indebted consumers, but at a macro level, remains reasonable relative to aggregate household disposable income. However, there’s another — and much more significant — source of support for consumption growth to continue.
The chart above reveals that mid- to upper-income earners account for nearly 80% of consumption in the United States. With aggregate household cash holdings still well above the pre-pandemic level, many households should still have plenty of liquidity to support future spending. In addition, it’s also worth noting that lower-income households have been experiencing better real wage growth (wage growth exceeding inflation) in recent months, which should also help buoy their capacity to spend going forward.
What’s the bottom line? Credit card debt outstanding doesn’t tell the whole story. Demand growth is a critical pillar to economic growth, with much of it coming from the higher-income consumers who are more likely to still be in a solid financial position.
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