Written by Steven Hansen
I have been saying for years that the rate of growth of consumer credit is not sustainable in the long term. Has the rate of growth begun to slow?
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The short answer is that it is too early to tell – but it does appear consumer credit is slowing. However, it is not necessarily obvious as credit spending after the past hurricane season did cause a spike in consumer credit. The graph below which shows the gentle deceleration of the rate of growth of consumer credit outstanding (blue line in graph below) over the last year.
Note that consumer credit data series does not include mortgages. The graph below shows the ratio of consumer credit outstanding to consumer spending. This ratio is now near historic highs, and well above the averages before the mid 1990s.
Ratio of Total Consumer Loans Outstanding to Consumer Spending
Including mortgages in the discussion of consumer credit is misleading – as most either pay money for rent or for a mortgage. Few have enough cash to buy a residence. So mortgages can be viewed as spending on accomodation for the purposes of this consumer credit. The graph below shows total credit for households is now growing – but at a rate still slower than seen seen since 1970..
Even though debt is expanding – the counter-balance is the low interest rates which translates into low debt service payments.
Credit interest rates are now on the rise. The expenditures for debt service payments will rise. The cost of borrowing money will take a larger chunk of income. Something will give – as we are currently beginning to see – a slowing of the rate of increase of consumer credit growth. For a complete analysis of the latest consumer credit data from the Federal Reserve [click here].
Will this translate into a slower growing economy. It will be a headwind, but consumer credit is just one of the forces acting on the economy.
Other Economic News this Week:
The Econintersect Economic Index for April 2018 strongly improved and returned to territory associated with more robust economic growth normally associated with expansions. After the last few months of mediocre data, this month much of the data significantly improved. The 3 month rolling average (which is the basis of our forecast) improved 16%. This is the highest reading since October 2017.
