The consumer-powered economy is running out of steam

Americans increased their spending faster than expected last month, but it likely came at the expense of personal savings.

According to the Department of Commerce, U.S. personal spending increased by 0.7% in September, up from 0.4% the previous month and higher than the median forecast of 0.5%. Adjusted for inflation, spending rose by 0.4%, up from 0.1% in August.

Consumers spent more on everything from prescription medication to food and beverages and healthcare and airfare. But all that spending meant fewer dollars to stash away into personal savings.

In fact, the annual personal savings rate fell to 3.4% in September from 4% the previous month.

While this normally wouldn’t be a problem, there’s growing evidence that Americans have depleted their excess savings from the pandemic, potentially leaving them in a weaker financial position. A lack of real income growth (adjusted for inflation) compounds this issue.

Personal income growth weakens

The Commerce Department’s report raised another red flag: Consumers aren’t earning enough to sustain their spending pace. Personal income from all sources rose by just 0.3% in September.

“That is not sustainable,” said James Knightley, chief international economist at ING. “Savings are finite and are being exhausted at a rapid rate,” while income growth weakens.

Knightley’s concerns about consumer spending echo what other economists said following the most recent blowout GDP report, which showed the U.S. economy grew 4.9% annually in the third quarter.

Bloomberg economist Eliza Winger warned that the brisk growth pace was driven by “temporary factors” tied to consumer spending, “which isn’t sustainable with disposable income dropping.”

If Americans aren’t getting their discretionary spending dollars from savings or income growth, that only leaves one other source to fuel their spending habits.

Taking on debt

Americans are indebted to their eyeballs, from auto loans, mortgages, and student loans to credit card debt, which surpassed a record $1 trillion earlier this year, according to the New York Fed’s Q2 credit report.

A new report from the Consumer Financial Protection Bureau (CFPB) showed that the problem is much worse than it appears on the surface.

Roughly 10% of general-purpose credit card accounts were in “persistent debt” last year, according to the CFPB. Being in persistent debt means more money goes toward interest and fees than paying down the card’s balance.

Americans paid a staggering $105 billion in credit card interest last year. That was before credit card balances exceeded $1 trillion and the Fed cranked up interest rates to 22-year highs.