Consumer Credit Is Now Growing At The Highest Rate In A Decade – Is It Unheathy And Unsustainable?

Alright, got your attention. But the headline above is not offered merely by way of titillation, as a former partner of mine would say—it has the added advantage of being true.

As many of you who frequent this space already know, I have been tracking the rates of change in the 3 month moving averages of U.S. consumer credit outstanding and retail sales since a piece we did on the subject in November of 2010.  We look at aggregate consumer credit (and not merely the revolving portion more commonly associated with retail activity) because we believe that term loan borrowing—where available (chiefly student loans and autos)—frees up cash for consumption.  Another way of viewing this is that transportation and education are not truly elective purchases and not leveraging those purchases would otherwise reduce overall consumption. 

What the numbers tell us today (as illustrated in the below graph) is that, as of January 2012, the growth rate in all forms of consumer credit on a 3 month average basis grew at a rate greater than at any time during the credit bubble.  Moreover, at $2.495 trillion, outstanding consumer credit stands a 97% of its peak of $2.576 trillion in August of 2008.  Deleveraging, my friends, this is not.

Yesterday the Consumer Financial Protection Board reported that student loans alone likely moved past the $1 trillion milepost at year end.  This not only acts as a present danger, but will reduce consumption years into the future as the present cohort of students enter their prime consuming years “pre-burdened” by indebtedness.  Normally, we would rely on post-recession rapid growth to reverse the situation, but in an oversupplied, demand-impaired global economy GDP growth proves elusive.

While aggregate payrolls are up 4.6% YoY since February 2011, as 2 million net jobs were created over the past year, this has come at the expense of declining realwages and pretty flat (up 1.8% YoY) nominal wages.  So the income/expense hole for many workers has become wider, and even the newly employed and re-employed are coming on in such low wage categories that when you subtract foregone transfer payments (unemployment and other benefits) their net additional income (and the contribution thereof to consumption/GDP) hasn’t risen all that much.

As we all sit here in our liquidity-bloated, but still over-leveraged, developed world economies, wondering if this year’s rendezvous with recovery will be the real thing – I offer the follow three thoughts with regard to the below graphic:

  • Are we once again entering a zone similar to the period immediately prior to the Great Recession in which consumer borrowing also grew rapidly more and more of the new borrowing was applied to debt service instead of new consumption? Watching retail sales trends over coming months should be instructive in this regard.
  • The crash in the housing market has left us with $873 billion in Home Equity Line of Credit balances (at Q4 2011) owed by consumers, most of which is no longer collateralized by home value. While borrowers may be making payments (many at vastly reduced rates of interest giver the floating rate nature of those loans), I would put forward the argument that as a practical matter unsecured consumer debt in the U.S. is actually well over $3 trillion.
  • We are programmed by past cyclical phenomena to look at consumer credit expansion after a recession as being a positive – heralding the arrival of the “confidence fairy” who the more supply-focused in the macroeconomic establishment view as the critical element to a recovery.  There is no doubt that there is an element of this in the expansion illustrated below but, like so many things about the present secular crisis, that is surely not the driving force when a substantial portion of the increased indebtedness is applied to making ends meet, rather than triggered by optimism about the future.

Click image for larger version.

This post originally appeared at EconoMonitor.

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