What Does the Surge in Consumer Credit Say About the Economy?

I’m pleased to announce that this week, acclaimed economics writer, Mish Shedlock, has joined the Deep Knowledge Investing Board of Advisors. Mish is a great thinker, detailed researcher, and clear writer. He’s offered DKI readers this guest post detailing the recent increase in consumer credit usage. His commentary on the beginning of a decline in still-too-high housing prices is timely as are his comments on Federal Reserve culpability for multiple asset bubbles. Let us know what you think of his piece and check out his blog here.

 

Credit card debt jumped in April, but let’s dig a bit deeper with inflation adjusted numbers to spot what’s really happening.

Consumer Credit numbers from the Fed, chart by Mish.

Consumer Credit numbers for April are from the Fed’s G.19 Consumer Credit report.

Nominal Growth Synopsis

  • Total Credit: +$23.01 Billion to $4.86 Trillion, a new high
  • Revolving Credit: +$13.48 Billion to $1.24 Trillion, a new high
  • Nonrevolving Credit: +$9.53 Billion to $1.24 Trillion, a new high

Nonrevolving Government Credit (student loans) is best viewed as essentially unchanged for three months.

Revolving Consumer Credit in Billions of Dollars

Consumer Credit numbers from the Fed, calculation and chart by Mish.

Real vs Nominal Revolving Credit

  • In nominal terms revolving credit surged to $1.24 trillion.
  • In real (inflation-adjusted) terms, credit card debt is $980 billion. That is below the per-pandemic high of $990 billion, and below the 2008 high of $1.09 trillion.
  • It’s real spending that drives GDP.

Nominal, as well as real, the slope of revolving credit is steep and unsustainable. It’s also a sign of consumer stress.

Nonrevolving Consumer Credit in Billions of Dollars 

Consumer Credit numbers from the Fed, calculation and chart by Mish.

Real vs Nominal Revolving Credit

  • In nominal term nonrevolving credit surged to $3.62 trillion. a new high.
  • In real (inflation-adjusted) terms, nonrevolving credit is $2.85 trillion. That is only 1.4 percent above the pre-pandemic $2.81 trillion.

Who Has Spending Cash?

Anybody with an existing mortgage prior to 2022 was able to refinance at or below 3.0 percent has extra hundreds of dollars to spend, every month, even if they overpaid for their houses.

Inflation has eaten up some of that refinance dividend, but refinancing certainly cushioned the blow.

Renters and those who more recently took out a mortgage are hit by higher mortgage or rent prices in addition to rising food prices, insurance costs, etc.

For those whose wages have not kept up with the price of rent and food (nearly everyone), credit cards or tapping savings is the only way to maintain lifestyles.

Three Classes of Zombies 

  • The Fed views corporate Zombies as firms that are unable to generate enough profits to cover debt-servicing costs and need to borrow to stay alive. I suggest two more classifications.
  • Consumer Zombies are those who want to move but cannot because they do not want to or cannot afford to trade their 3.0 percent mortgage for a 7.0 percent mortgage.
  • Consumer Zombies also include those trapped in rental units hoping to buy a home but have no realistic hope to do so.

The Starter Home Is No More

Zombie renters dream of homeownership but are priced out of secondary cities they might’ve flocked to years ago.

For discussion, please see The Starter Home Is No More, Even in Second Tier Markets

Case-Shiller Top City Home Prices Decline From a Year Ago for the First Time Since May 2012

Case-Shiller and CPI data via the St. Louis Fed, chart by Mish.

However, the decline is but a drop in the bucket compared to price increases since 2011.

Case-Shiller and CPI data via the St. Louis Fed, chart by Mish.

Index levels

 

OER stands for Owners’ Equivalent Rent, the price a homeowner would pay to rent their own house, unfurnished, without utilities.

On May 30, I noted Case-Shiller Top City Home Prices Decline From Year Ago for the First Time Since May 2012

Meanwhile, the average mortgage rate is 6.94 percent according to Mortgage News Daily.

Winners and Losers

The Fed created this set of winners and losers, and it did so on purpose to increase inflation. Now the Fed does not know what to do with the inflation mess it created.

Housing generally leads the economy into or out of recession. Think of all the appliances, carpet, cabinets, and landscaping that happen when people buy homes. Also think of household formation and plunging birth rates.

The Fed cannot afford to stimulate housing out of fear of stoking more inflation. And it has stranded three classes of zombies in the wake.

So don’t expect much more than a weak, near-recession GDP, if that, for quite some time.

It’s payback for three rounds of mostly unwarranted fiscal stimulus on top of serial bubble-blowing Fed policy.

Mike “Mish” Shedlock
@MishGEA on Twitter

 

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