After two years of saving throughout the pandemic, rates of consumer debt are soaring as people are spending more. And while some level of debt can be good for the economy, experts say it can be concerning that Americans are spending more than they're saving. Kristin Myers, Editor In Chief of The Balance, joined Cheddar to explain how consumer debt impacts the economy. 

Opening Bell

U.S. Consumer Debt Soars As Spending Increases

here to break this all down. As Kristin Myers editor in chief of the balance, kristen, what are some of the factors contributing to the rate of consumer debt that we are seeing right now? Yeah, well, according to some of the latest numbers, most of that debt is actually housing debt, about 11.5 trillion of that is housing debt. With the rest essentially making up that non housing debt, as we've seen, particularly over the last two years, a lot of folks have more discretionary income and they are choosing now to relocate and so they are continuing to buy houses as we've been seeing in this housing market right now, it is red hot even though mortgage rates right now are continuing to rise, currently sitting at over 5.6% but that is not stopping some of those buyers again that are taking on bigger and bigger balances at least to their home home balance sheets. In the form of some of those mortgages. I look at housing debt and I would consider that and correct me if I'm wrong, A healthier form of debt. Right? But when we look at kind of elevated debts, potentially now we're coming as people are dealing with inflationary kind of pressures, how does the level of debts again that we're seeing now essentially in the future impact the economy. And it is, it's a good sign that americans are spending more, are really more concerning that they're going to be racking up more debt. Yeah, that's a really great question, because Having a high amount of debt, high amounts of household debt is not necessarily a good thing for the economy, especially if it starts to impact that consumer spending which is about 70% of the US economy. So it is incredibly crucial that we do have consumers and Americans going out there continuing to stimulate the economy by buying. However to your point taking on household debt typically is a good measure of good debt because you do accrue wealth essentially through owning property. However we're in a tricky situation right now where a lot of economists are saying we could be hitting a recession soon and so some of those homes that a lot of people are purchasing. it could be worth less in a couple of years and if folks want to leave and want to move they might end up taking on a hit. There's nothing worse as a homeowner to be upside down on your home. Even if you had kind of a lower interest rate to be lower is certainly a concern at what point does consumer debt and consumer spending more broadly really is about to your .3 quarters of the economy. But at what point does consumer debt start to dampen spending and when do you think we could actually start to see that happen? Or are we already? Yeah so we actually see right now consumer savings is actually starting to decline, it was about 6.2% in March and that's coming down from 6.8% in february and that's because of inflation right now, frankly everything is just incredibly expensive groceries are on the rise gas as everyone has seen, who drives uh continues to increase and that is really denting right now, the savings that consumers are able to have and as a result they are racking up more and more credit card debt. However, I will say that that there are some good signs here at least in the first quarter that some of that credit card debt did start to decline. However, generally speaking, you want to have a healthy amount of savings, particularly when the economy takes an economic downturn, which again, all signs are pointing that that could be coming in the next year or so. However, we do see wages are increasing, we see unemployment rates at low levels. So it does seem right now that americans are at least financially able to take on a lot of the debt that they are are currently incurring at least again in the form mostly in the form of housing. So there are some warning signs but I don't think that we need to necessarily panic that the strength of the american household financially is weak. I certainly think there's creates the strength of american household is resilient right now, but we know the environment is shifting one of the things going up in addition to everything else is interest rates right? So I think when you look at paying off credit card debt, mid kind of the Fed activity that we're seeing in interest rates go higher, is there going to be an impact to the average american consumer and it's going to get more expensive to pay off some of that debt. Absolutely. I mean every time the Fed raises rates and even, you know, Fed chair jay Powell speaking yesterday and reassuring everyone that the Fed was going to continue to raise rates as necessary to continue to fight inflation. So what I think american consumers can expect is that the debt that they hold at least aside from those mortgages, that credit card debt, for example, is going to get more and more expensive and if they do not have the savings to really help boost some of that spending and the savings to really help pay off some of that debt, that's when we're really going to start to see a lot of problems. And if we see people rush to pay off that debt now because they're worried about interest rates getting higher, that likely pulls back on consumer spending and then we get that slowdown happening much faster. A unique kind of dynamic happening right now in the market, Kristen really appreciate your time and your insight, Kristin Myers editor in chief of the balance