If there is a running narrative about the financial habits of Gen Zers, it’s that they have largely avoided being reckless with their spending and debt. As recently as 2020, Gen Z borrowers saw a 6% reduction in their use of available credit, which ranked first among age demographics, according to Experian. This helped fuel a 13% increase in average credit scores for Gen Z.
See: 10 Things To Stop Buying in 2023
Read: Get Your Credit Score On Track With These 3 Tips for Success
The Future of Finances: Gen Z & How They Relate to Money
But lately there have been signs that Gen Z consumers are getting deeper into debt — a trend that some say could portend an upcoming recession.
An Urban Institute analysis of credit bureau data conducted last year found that nearly 20% of young U.S. adults (18 to 24) with a credit record have debt in collections — a sign that they struggle to meet current financial obligations.
Many young adults “may rely on credit cards to finance daily and emergency expenses,” the analysis declared. Among young adults with a credit card, 4.5% hold delinquent credit card debt.
A separate analysis from payments data and news platform PYMNTS, released on Dec. 29, found that roughly two-thirds (65%) of Gen Z consumers are living paycheck to paycheck. Generation Zers in this category report the lowest average savings of all age groups, at $1,158.
These trends are not necessarily surprising. One reason Gen Z and other consumers were able to improve their credit standing in 2020 is because the COVID-19 pandemic shut down much of the economy, which led to less spending and more saving. In 2022, the situation reversed itself as the highest inflation rate in 40-plus years led the Federal Reserve to aggressively hike interest rates.
Gen Z Spending Could Signal Coming Recession
But it is still troubling to see Gen Zers abandon some of the financial principles that earned them kudos – partly because their rising debt and shrinking savings could be a sign of a recession. This possibility was raised in a recent Credello blog — Credello being a personal finance tool that aims to simplify financial decisions through personal, on-demand recommendations.
“Economists are considering the increasing trend of taking on debt for everyday expenses as a canary in the coal mine for the greater economy as a whole,” the blog detailed. “Is Gen Z trying to warn us of an impending recession?”
Credello also noted that the trend of using credit cards for everyday expenses — which more consumers in all age groups have been doing lately — is a “warning sign” for the economy as a whole.
“Economists have been watching this trend with apprehension because it’s indicative of a more significant problem: People are increasingly opting to borrow money to cover their everyday costs because they cannot save enough from their take-home pay,” the blog indicated. “If the economy starts to decline, people will find it increasingly difficult to cover their basic expenses, leading to a recession.”
How Severe Will 2023’s Recession Be?
Fears of a recession have been a running theme over the past year or so, with many economists predicting that the economy will eventually hit a wall.
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More: Gen Z vs. Millennials: How Their Retirement Savings Plans Compare
Jeff Buchbinder, chief equity strategist for LPL Financial, wrote in a recent email to GOBankingRates that: “The consensus sees a U.S. recession coming in 2023, though opinions vary widely on how significant it might be. LPL Research acknowledges that a recession this year is probably more likely than not at this point.”
But Buchbinder also noted that inflation should continue to decline this year — it fell to 6.5% in December 2022 to reach its lowest point in more than a year — which should lead to an end to interest rate hikes this spring. This, in turn, could bolster corporate profits, which may help the economy avoid a recession.
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This article originally appeared on GOBankingRates.com: Gen Z Shifts To Taking on Debt: Is It a Foreboding Sign of Recession?
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