Consumer Credit and Growth
Hopes are high for strong economic growth in America's near future. President Trump's economic plan hinges on an economic growth rate near 4%, and markets so far are expecting him to be able to deliver at least partially on his promise.
A 4% growth rate will be difficult, if not impossible, to achieve without significant consumer spending and requisite consumer borrowing. Regardless of the tax rate, companies are not going to expand and grow without expecting a corresponding increase in consumer demand. So far, that demand does not seem to be sufficient to meet the President's goals.
Federal Reserve data for April revealed the smallest increase in consumer borrowing in nearly six years. Total consumer credit reached $3.82 trillion in April after seasonal adjustment, for an annualized growth rate of 2.6%. April's consumer credit rise of $8.2 billion represents a significant drop from March's $19.5 billion increase.
Combine this with the relatively stagnant growth in gross domestic product (estimated at 1.2% in Q1 of 2017) and a sharp drop in consumer spending (0.3% in Q1 2017, down from 3.5% in the previous quarter), and we get a potential recipe for growth that is far too slow to meet collective expectations.
Credit Growth Slows Across the Board
Rates of growth in consumer credit slowed across consumer credit categories (mortgages are excluded from the Fed data). The rise in revolving credit, which consists mostly of credit card debt, fell from 6.5% in March to 1.8% in April. Growth in non-revolving credit, covering installment loans such as student loans and auto loans, dropped from 6.1% in March to 2.9% in April.
On one level, that's good news. It's important that consumer debt levels remain manageable to avoid future economic problems, and there have been some troubling signs in that regard. Collective household debt in the first quarter of 2017 passed the pre-recession peak of $12.68 trillion in Q3 of 2008 even with a $15 billion drop in credit card balances. Student loan debt is reaching dangerous levels, with $1.34 trillion in total outstanding debt in Q1 – surpassing all categories of consumer debt except mortgages – and total delinquency and default levels on student loan debt have reached 11%.
Continued debt reduction in general would be good news, but not necessarily at the expense of economic growth. Are we looking at a temporary drop in consumer credit instead of the beginning of a trend? Economists seem to think so. Spending is widely expected to rebound in the next quarter, partially balancing out April's decline and positioning spending along the long-term trend line.
Back to Normal?
A single bad month, even if it is spread across multiple indicators, does not make a trend. It's insightful to look at the changes over time and remember that we are not talking about an overall reduction in consumer credit – just a slowing of the growth rate.
The three-year period around the depths of the Great Recession (2008-2010) represented the only true reductions in consumer credit in the last 22 years. Since 2009, the rolling 12-month average of consumer credit growth has been on an atypically steady rise. April's drop appears to be simply leveling out the growth rate in the long term to pre-recession levels, and a tempered rise in May would bring the 12-month rolling average in line with typical patterns.
Economists blame the weather and other transient factors such as delays in income tax refunds for the slowdown, and cite positive statistics like the increase in savings (from $778.9 billion in Q4 2016 to $814.2 billion in Q1 2017) in predicting that consumer spending – and therefore borrowing – will rebound in the next quarter. Is this wishful thinking or recognition of typical noise in the economy? We will find out soon enough.
A temporary slowing of consumer credit may not be the best thing for the national economy, but it might be the best course of action for you on a personal level. Is your debt starting to rise without any obvious end in sight? If so, it's time to take action.
Begin by making sure that you have a reasonable budget that results in a surplus – otherwise, you will not be able to pay down your debts. Examine your expenses to see where you can cut costs, but don't forget to look at potential income additions as well.
Once that budget is in place, stick to it as best as you can. Devote your surplus to paying down debt with a small amount left over for emergency funds, and resist the urge to engage in impulse spending. As you start to pay down debts, positive momentum will increase and you will adjust to your new spending level.
Responsible use of credit is always the right choice, whether it's on the national level or the personal level. You can do your part to propel America's growth without spending beyond your means.
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