Americans are saving a lot less now than they did during the pandemic, but it’s not all bad news, according to the Fed.

“Household savings soared in the United States [...] during the pandemic as consumers cut back on spending while government policies supported incomes,” according to a recent report by the New York Fed.

Those excess savings are being put back into the economy through higher spending.

The Fed noted that this trend is uniquely American. Households in other similar, high-income countries have continued to grow their rainy-day funds since 2020.

Economists say this is a double-edged sword that could be good for the economy in the short term but detrimental to household finances in the long run.

Shrinking American savings are growing the economy

Because of the free-wheeling spending of U.S. households, American GDP is back in line with its pre-Covid trend, less than three years after the pandemic.

In September, U.S. retail sales rose for the sixth month in a row. Retail and food sales topped $704 billion, according to the Census Bureau. That was 0.7% more than August sales and 3.8% higher than September 2022.

Online spending was on fire last month, and non-store retail sales were up 8.4% over last year.

Factory output to meet consumer demand is also rising as Americans break open the piggy banks. Industrial production advanced at a yearly rate of 2.5% last quarter. U.S. manufacturing also rose steadily in September, as output grew by 0.4%.

American consumers aren’t even letting sticky inflation stand in the way of their buying splurge. The price of seemingly everything—hotels, haircuts, and sneakers—is up, yet consumers are undeterred.

But GDP and consumer spending figures mask an underlying problem: Americans are up to their eyeballs in debt.

Skimpy emergency funds and more consumer debt

The divergence in U.S. spending in 2023 shows Americans have higher consumer confidence, income security, and credit resources than their counterparts in other wealthy nations.

The problem is that inflation-adjusted earnings haven’t kept up with spending, so credit makes up the difference.

The New York Fed’s data shows U.S. consumer debt has continuously set new record highs since 2020. During the summer, American credit card debt surpassed $1 trillion for the first time ever. That’s on top of mortgage debt, personal lines of credit, and student loans.

Economists say the growth in consumer debt isn’t sustainable and could be detrimental to household finances as interest rates rise.

“The problem is savings are finite and the banks are tightening lending standards significantly,” ING economist James Knightley told Business Insider. “Credit card borrowing costs are the highest since records began in 1972, so there is going to be a lot of pain out there.”