Gen Z finances are really going down, and we’re not in a recession yet

Young Americans are still spending as the holiday shopping season ramps up, but they are running out of money. With a recession likely next year, it arguably couldn’t come at a worse time.

After declining in the past few years as borrowers paid off their balances, US credit card debt increased by $38 billion between July and September this year, according to the New York Federal Reserve. The 15% annual increase was the largest in more than 20 years.

Right now, credit card debt remains below pre-pandemic levels, and to some extent, a slight uptick was to be expected as consumers emerged from lockdowns and faced higher prices.

But the “real test,” New York Fed researchers wrote in a November blog post, is “whether these borrowers will be able to continue making payments on their credit cards.” The signs are that Generation Z, in particular, is starting to feel the pressure.

While total delinquencies remain below pre-pandemic levels, the proportion of credit card payments that are 90 or more days past due rose to 3.7% in the third quarter, up from 3.2% a year earlier.

While all age groups saw a rise in missed payments, the largest increase came from 18- to 29-year-olds, where the more than 90-day delinquency rate rose to more than 6%, although still lower than the rate of nearly 9% before. The spread of the epidemic.

It is not just credit card debt that young borrowers struggle to pay off either. The rise in auto loan balances also coincided with a rise in the delinquency rate of cars.

Of the overall increase in missed payments, the researchers wrote, “Is this just a return to previous levels, as patience runs out and stimulus savings dry up, or is this a sign of trouble ahead?”

Gen Z could run out of money and take on more debt at the worst time as a recession approaches

US consumer spending in September rose above expectations, and many companies reported strong results in recent weeks. But even well-performing companies have raised alarms about how much inflation is weighing on their customers.

During the height of the pandemic, households amassed nearly $2.5 trillion in “excess savings” — more than they would have saved if there had been no pandemic — as stimulus measures kicked in and lockdowns gave Americans fewer opportunities to spend their money. As a result, the personal saving rate has risen to an all-time high.

Today, however, inflation is causing Americans to spend more and save less, and as a result, the savings rate is near its lowest level since the Great Recession. The $2.5 trillion in excess savings fell to between $1.2 and $1.8 trillion in the third quarter of this year, and economists estimate it will all be gone in less than a year.

As inflation takes its toll, it leaves many young Americans even worse off, and if the economy takes a turn for the worse, many young Americans could find themselves with depleted savings just as desperate for a financial cushion.

This is because young Americans are among the individuals hardest hit by the economic downturn.

“For young people, the recession could have long-lasting consequences,” Bureau of Labor Statistics economist Geoffrey Ball wrote in a 2019 blog post. “For example, young people have more difficulty than usual entering the workforce or keeping a job occupied at the onset of a recession. Any delay in hiring can reduce the accumulation of assets over their lifetime.”

While layoffs remain largely concentrated in the tech industry right now, more than 1 million Americans could lose their jobs next year, based on the Federal Reserve’s unemployment rate projections.

If this happens, there is reason to believe that American youth will be particularly affected. In 2020, for example, the unemployment rate for Gen Z rose from 8.0% in February 2020 to 26.9% in April, while the unemployment rate for millennials increased from 4.0% to 14.3%. However, the Gen X unemployment rate increased from 2.9% to 11.7% over the same period, while the Boomers unemployment rate increased from 2.6% to 12.5%.

And when young people remain unemployed for long periods or are forced to work in low-paying jobs to earn an income, this can have long-term financial consequences. For example, the Census Bureau found that the Great Recession cost average millennials nearly 13% of their earning potential between 2005 and 2017.


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