Consumer credit expanded at a 10.2% annual rate in March. Of that, nonrevolving credit grew 11.3%. This “includes automobile loans and all other loans not included in revolving credit, such as loans for mobile homes, education, boats, trailers, or vacations.” Revolving loans, mainly credit card debt, grew at 7.8%. For the Fed’s G19 report go here.
To make it easier to visualize, here is a graph that shows an historical perspective:
Bloomberg notes that it is the biggest gain since November, 2001. (Of course you recall what happened in September, 2011.) The data suggests that it was due to a jump in student and auto loans. Auto sales “soared” in Q1. Edmunds attributes that to pent-up demand, an aging “fleet”, warm weather, fleet sales, and growing consumer confidence. Consumer confidence they noted, closely follows the stock market. Auto sales heavily influences these data since nonrevolving (auto) loans are double revolving (credit card) debt.
In normal times one would say that credit growth is a sign of a healthy economy. In times where so-called “economic growth” is a figment of quantitative easing, it is not healthy. Americans are still heavily in debt:
It is easy to see from this chart: consumers kept piling on debt (blue line) up until the Crash in 2008 when fantasy ran into reality. For almost 30 years (1959 to 1989), the debt to income ratio was relatively healthy. From roughly 1990 forward money supply and credit began to expand as several boom-bust cycles caused a continuous build-up in debt, a result of the idea that monetary inflation could create wealth. By 2008 it was obvious that it didn’t.
So now we have economists saying that the present build up of consumer credit is a sign of healthy economic growth. How can that be? It is rather more evidence of economic weakness brought about by injections of monetary steroids.
Compare the consumer credit statistic to consumers’ declining savings rate (dropping below 4%) and it tells us that with static wage and earnings growth consumers are funding consumption with debt and savings. Not a healthy sign for an economy that needs savings, not spending. You can’t rebuild the economy and create prosperity on more debt. We first need savings; then comes production. We need a lot of other things to get the economy grow, but getting consumers deeper into debt isn’t one of them.
From the second chart it looks like debt as a percent of income fell from a peak of 23.5% to a low of 21.24% and is back to 21.5%. It seems hard to me to think there can be much impact over a couple percentage points. Maybe it is just a matter that debt to income is not evenly distributed in the population and some people are in dire shape because of debt while others are just fine. It would have been nice to know debt to income going back more years; the top chart is just an index. It is a telling chart of course, thank you.
The second chart is more explicatory here. The level of overall consumer debt is too high and is stifling expansion because it represents debt from consumption stimulated by fiat money. The fact that consumers have been reducing debt post Crash is a positive note. But what the data tells me is that consumers are running into a wall and financing necessities through debt. Auto production is a positive, but with real wages actually declining, I doubt it will last.
hi Jeff, i think your thesis is playing out. all is not bad in the world, on the surface at least, but there is clear weakness showing itself.
bravo.
Thanks, DD.
My partial translation of Jeff’s post into market action is that debt-fueled earnings and debt-fueled economic activity deserve a low multiple on both metrics. Thus I continue to be cautious about stocks as a whole, though who knows where Mr. Market moves their prices when interest rates pose no real competition. IMHO we are on an opposite valuation pole to the 1945-50 period, when stocks were feared (7% dividend yields) and Treasurys were roughly at today’s yields. What ensued: the best multi-decade period of stock vs bond outperformance in modern US history. Right now this analogy and the past 20+ year history of Japan continues to lead me to say what I stated in my blog in Jan. 2009: that the US was going Japanese, tho it’s able to sustain more inflation given we’re the most powerful nation on earth.
That interest rates up and down the yield curve and all over the globe are so low is disconcerting to me. It “should” IMO be especially disconcerting to those who are macro bullish.