Written by Steven Hansen
There is good correlation between consumer credit growth and GDP – except during the 2001 recession.
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The comparison of the year-over-year growth of consumer credit growth (with student loans removed – blue line) to GDP (red line) is shown in the below graph.
Consumer credit is the grease of the economy.
Is all this going to be changed by Hurricanes Harvey and Irma? Most consumers with damage must borrow money to repair the damage to their residences and their cars. Expect a surge in consumer credit outstanding over the coming months. [Note that certain types of equity loans will not appear as consumer credit – consumer credit does not include home mortgages.]
Living in South Florida, we were affected by Hurricane Irma. In my case, we suffered no real damage – and there was little damage around us even though gusts neared 100 mph. But the economic affects are tremendous. Beginning Thursday 07 September – the Florida economy collapsed. Little was left in stores or gas stations and schools closed. A week later, a significant portion of small business still has no power or deliveries. So in the short term there will be a loss to the economy as 10% of the population of the USA was affected by Harvey and Irma.
My view is that disasters have a certain economic cycle:
- additional spending to prepare for a disaster (if applicable) – less money to spend on other things this month
- the absence of economic activity during the disaster and the immediate aftermath
- spending to repair or replace. If it was cash/savings, less to spend on the iphone X. If it was bought on credit, likely one has the money for the iphone X.
- those that borrowed to pay for repairs or replacement, will have less monies to spend in the future in order to repay the loan.
The fact is that the average Joe was screwed by Harvey and Irma. Income was lost, and money that did not need to be spent will be spent. Disaster costs seem good for the economy in the medium term but really bad for those affected. So numbers may get added to GDP but is the economy really helped? Bastiat called this view of economic benefit the Broken Window Fallacy. And there were a lot of broken windows (among other things) as a result of Harvey and Irma.
For a complete recap of our analysis of consumer credit is [here].
Other Economic News this Week:
The Econintersect Economic Index for September 2017 continues to remain in a tight range indicating static economic growth fundamentals for the fifth month in a row. However, this tight range remains in territory associated with normal growth. Six-month employment growth forecast is now indicating little change in the rate of employment growth.
Bankruptcies this Week from bankruptcydata.com: Privately-held Vitamin World, Ironclad Performance Wear, Seadrill
