Consumers kept the economy hot in 2022. Now they’re losing steam

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For a year that held promise of a return to normalcy, 2022 threw plenty of curve balls at the American consumer.

Supply chains remained in disarray as ongoing snarls were drastically worsened by lockdowns in China and Russia’s invasion of Ukraine, average US gas prices shot north of $5 per gallon for the first time ever, inflation spiked to levels not seen since the early 1980s, and interest rates quickly soared as the Federal Reserve dug in its heels and took a whatever-it-takes approach to rein in soaring prices.

Consumers armed with plenty of pandemic-induced pent-up demand and bountiful financial buffers kept the economy churning throughout much of 2022. Spending, adjusted for inflation, remained above 2021 levels, landing at 2% as of November, according to the Bureau of Economic Analysis.

“In general, most people’s finances are probably better than we give them credit for,” said Ted Rossman, senior industry analyst at Bankrate. “But I think there are reasonable worries that may not last.”

Consumer spending remained resilient throughout much of 2022. However, stubbornly high inflation has taken its toll and knocked the stuffing out of the financial cushion. With interest rates poised to go higher in 2023 and economic uncertainty sure to grow, consumers could be starting to run dry at the worst time.

“A lot of people have been able to keep up with the bills, they’ve been able to save more; it’s just a question of, ‘where do we go from here?’” Rossman said.

That could quickly change if the historically low unemployment rate ticks up as the Federal Reserve and economists expect, he said.

Americans’ personal savings rate reached an all-time high during the pandemic as many locked-down workers saved on the cost of their daily commute and other expenses, and benefited from government checks meant to stimulate spending. But the household savings rate now sits at 2.4%, the lowest level since 2005 and the second-lowest rate going back more than 60 years.

Household financial obligations (i.e. debt) as a percentage of disposable personal income hit an all-time low of 12.57% in the first quarter of 2021, according to Federal Reserve data. That share has now ticked up to 14.49%, well below average rates of the past 40 years, as consumers lean more on credit cards and other borrowing.

As of September 30, credit card delinquencies remained near historic lows with a 2.07% rate, according to Federal Reserve data. However, that rate is higher than the previous quarter and was reached at the fastest pace on record, according to Fed data going back to 1991.

Auto loan delinquencies, which fell to the lowest level since 2003, are revving up to pre-pandemic levels; however, those delinquencies are climbing faster than they have during those nearly 20 years.

“Auto delinquencies do seem to be the biggest trouble spot at the moment, more so than things like credit cards and mortgages,” Rossman said.

The biggest problem with car loans is that the spike in prices [during the pandemic] caused people to get in over budget. The rate hikes haven’t helped, he added.

“We’re seeing more people taking out $700 or $800 monthly payments and loans that are lasting five, six, seven years,” he said. “It seems like a lot of people have already gotten over-extended on this, and that does seem to be leading to more worries about delinquencies and defaults, especially in the auto space.”

The average monthly payment for a new car was $703 in the third quarter, up nearly 26% from 2019, according to

Although delinquencies, defaults and repossessions are on the rise from record lows, they aren’t expected to soar to “red-alert levels,” said Jonathan Smoke, chief economst at Cox Automotive.

“The real worry in the market right now is a recession, not a tsunami of repossessions,” he wrote in a post last week. “We have been expecting loan defaults and repossessions to increase, but long-term expectations through mid-decade (2025) suggest overall defaults and repossessions will remain within expected norms.”

The pendulum is swinging from a place where many of these metrics were artificially low, Rossman said.

“Things don’t feel great with high inflation and higher interest rates, and it’s not great that, at the moment, the saving rate has slipped to just 2.3%; but in terms of money that some people have in the bank, it’s a lot more,” he said.

Pandemic aid combined with a drastic curtailing of consumer spending during the height of the pandemic allowed people’s savings accounts to balloon. Fed economists estimated that between 2020 and through the summer of 2021, US households accumulated $2.3 trillion in savings in excess of pre-pandemic trends. Consumers have been draining those coffers to an estimated current range of $1.2 trillion to $1.8 trillion, according to JPMorgan Chase.

“That trillion and a half dollars will run out some time mid-year next year,” JPMorgan Chase CEO Jamie Dimon told CNBC earlier this month, noting that inflation is “eroding” the pile of savings.

And American’s dependence upon credit cards and other forms of financing — including “Buy Now, Pay Later” installment loans — is growing, Rossman said.

“[BNPL] may feel better than a credit card, because it may have a lower interest rate, and it may have a shorter term, but it may also encourage you to overspend,” he said.

Headwinds are gathering, and that could put pressure on household spending — which makes up the lion’s share of the US economy.

“The main engine of US growth — the consumer — is still running, but as we head into 2023, three key factors suggest it will lose considerable steam,” wrote Gregory Daco, EY Parthenon’s chief economist, in a note earlier this month. “First, the soft income trend will weaken further in 2023 on softer compensation and employment growth. Second, the ‘savings dip’ is unprecedented and unsustainable. Third, the credit splurge is a true risk, especially for families at the lower end of the income spectrum.”

EY Parthenon projects that consumer spending will flatline in 2023 after growing 2.7% this year. Persistent inflation, tighter financial conditions and weaker global growth could help tip the United States into a mild recession during the first half of the year, Daco noted.

“With household sentiment historically depressed and savings cushions rapidly dwindling, consumers will likely grow increasingly reluctant to spend in coming months,” he wrote. “This will become more apparent as labor market conditions deteriorate and household wealth takes a hit from falling stock prices and declining home values.”

But consumers, while showing resiliency, also are showing some restraint, said Matt Kramer, national sector leader of consumer and retail for KPMG.

Consumers are “definitely making tough choices [and taking] a pause on the larger ticket items’ focusing on non-discretionary items,” he said.

Those adjustments have included buying fewer gifts and seeking out savings, he said. That frugality has extended to purchase of essentials. Discount retailers such as Walmart and Dollar General have reported an increase in wealthier customers.

“We may have a tale of two years within 2023, with the first half being a bit challenged with the economic headwinds but coming out of it in the back half with things looking more favorable and consumers being a little bit more willing to spend with the positive outlook that’s ahead,” Kramer said.


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