U.S. consumers will soon wake up to ‘out of control’ interest on their credit cards, economist says

The U.S. economy should be able to avoid a recession next year — but a sharp pullback in consumer spending is among the biggest risks of that occurrence, according to economist Carl Weinberg.

“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,” the chief economist of High Frequency Economics told CNBC’s “Squawk Box Europe” on Wednesday.

“That’s going to lead to, I think, a retrenchment in consumer spending, as we get into the new year.”

Weinberg’s base case assumes a slowdown in growth, rather than a recession.

“But the risk is, and I agree it’s a non trivial risk, that consumers get into trouble,” Weinberg said, noting figures from the New York Federal Reserve show a rise in delinquencies on credit cards.

“Real incomes have just started coming back again, and not by nearly enough to cover some of the increases in the debt burdens that we’re seeing. So credit to the household sector, consumer credit cards, that’s where the downside risk is. That’s where the risk to this Goldilocks forecast is, and I’m watching it.”

A “Goldilocks” scenario is one in which an economy is growing enough to avoid a recession and a negative hit to the labor market, but not so strongly that it fuels inflation.

A U.S. recession in the first half of next year is the base case for Monica Defend, head of the Amundi Investment Institute.

“Financing and financial conditions, eventually, will start to bite the U.S. consumer that is progressively depleting the excess savings that have been… protected during 2023,” Defend told CNBC on Wednesday.

“Consumption will slow down, we’re seeing the labor market progressively cooling, and this is going to continue. And therefore, we do expect a technical recession in the United States first and second quarter.”

Many strategists see the U.S. as having achieved a “soft landing” for its economy through interest rate hikes. They nevertheless remain cautious on the outlook for 2024, as they warn of the delayed and unpredictable impacts of higher rates.

U.S. growth has stayed strong this year, as other major economies — including the euro zone and U.K. — have stagnated.

Investment stimulus delivered by initiatives such as the Inflation Reduction Act will not be enough to overcome the slowdown in consumption, Defend argued on Wednesday.

“During the pandemic, there has been substantial transfers from the government into households and, therefore, consumers. If you look at saving rates, it has been really peaking, but now is pointing south quite remarkably,” she said.

“Because of this and the excess savings actually depleting, we don’t think that the U.S. consumer will be able to stand and to maintain the same levels it had over the last two years.”