Echoing the likes of Tesla's Elon Musk and "The Big Short" investor Michael Burry, a veteran economist has warned that American households have racked up historic amounts of debt — and the economy will pay the price.
"Consumers are just waking up to the fact that they're financing their spending by running up their credit cards, and that the interest on those credit cards is over the top, out of control, off the hook right now," Carl Weinberg told CNBC on Wednesday.
"That's going to lead to a retrenchment in consumer spending as we get into the new year," the chief economist at High Frequency Economics added.
Musk painted a similar picture in October. "A large number of people are living paycheck to paycheck and with a lot of debt," he said, noting credit-card payments have hit "extremely punishing" levels. "If you cannot pay them off and you're still accruing interest at 20%, you're at best headed to a bad place."
Similarly, Burry cautioned in 2022 that consumers were blowing through their pandemic savings, putting less money away, and swiping their credit cards more often to afford higher prices and rising interest payments. He predicted that would inevitably lead to a spending slowdown and a recession.
Citadel's Ken Griffin, bond billionaires Bill Gross and Jeff Gundlach, JPMorgan's Bob Michele and Mike Wilson, and economists David Rosenberg and Stephanie Pomboy have all raised similar concerns.
Their worries are rooted in the fact that American consumers have faced a double-whammy of brutal inflation and surging borrowing costs over the past 18 months or so. The annualized pace of price growth hit a 40-year high of over 9% last summer, and has remained close to double the Federal Reserve's target rate of 2% in recent months.
The central bank has hiked interest rates from essentially zero to above 5% to temper inflation. That has sharply raised how much Americans pay monthly for their mortgages, car loans, credit cards, and other debts.
For now, Weinberg only expects a pullback in household spending to cause an economic slowdown, not a full-blown recession.
"I'm not prepared to predict that the wheels are going to come off the bus," he said. "But the risk is, and I agree it's a non-trivial risk, that consumers get into trouble."
Weinberg pointed to recent New York Fed data, which showed that credit-card balances jumped by nearly 5% to a record $1.1 trillion last quarter, delinquencies rose, and overall debt loads climbed. Meanwhile, people's real incomes haven't grown fast enough to offset their greater borrowing costs, he said.
"Credit to the household sector — consumer credit, credit cards — that's where the downside risk is, that's where the risk to this Goldilocks forecast is," he said, referring to hopes that the Fed can bring down inflation without triggering a recession.
Weinberg added that in his view, inflation spiked due to the burst of monetary and fiscal easing during the pandemic, and should return to normal levels soon. As a result, he expects the Fed to cut rates significantly next year.
