American Consumers Propping Up Economy With Money They Don’t Have

Consumer debt is driving American economic growth.

Total outstanding consumer debt surged over $4.1 trillion in the second quarter of 2019, according to the latest data released by the Federal Reserve.

American indebtedness grew by 4.9 over the year, and the quarterly gain from Q1 to Q2 came in at $60 billion — the biggest second-quarter increase since Q2 2016.  Over the last 12 months, American consumers have piled on an additional $208 billion of debt.

The consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt.

As Peter Schiff noted in a podcast after the Q2 GDP number came out, this notion that the US economy is strong is “fake news.” Consumer spending increased by 4.3% and contributed nearly all of the GDP growth. Many of the headlines credited the American consumer with “rescuing the economy.” But much of that consumer spending is going on credit cards. As WolfStreet noted:

American consumers are not slackers. They are doing their collective job, propping up the US economy, and by extension the global economy, with money they don’t have.”

Revolving credit – primarily credit card debt –  increased at an annual rate of 5.3% in Q2. Americans currently owe $1.07 trillion on their plastic. According to WolfStreet, this was a record for a second quarter and was only topped by the “holiday shop-and-borrow” season in Q4 2018.

As WolfStreet notes, in some ways, the consumer debt picture looks better than it did in the prior peak before the 2008 crash. Factoring in inflation and population growth, American consumers have shed credit card debt. But there is what WolfStreet calls a “bifurcation.” Many credit card users pay off balances monthly. But there is a rotting foundation underneath that could collapse at any time.

Then there are the tapped-out consumers with multiple maxed-out credit cards, or with credit cards with large balances, and consumers with personal loans, payday loans, etc. And they’re paying a fortune in interest at double-digit rates because they don’t have the money to pay off those loans. They can barely make the minimum payments and get to the next paycheck. These are the folks who owe that $1 trillion. And this is why credit card debt curdles so quickly during a downturn. People with credit card debt have little wiggle room.”

Non-revolving credit, which is primarily student loans and auto loans, was up 4.8% on the year and now stand at just a tick under 3.01 trillion.

Total auto loans and leases outstanding for new and used vehicles were up 4.0% in Q2 to a record $1.17 trillion. This despite a 1.5% decline in new vehicle sales and tepid used vehicle sales. And as we reported earlier this year, auto loan delinquencies in the subprime market have already risen to levels approaching the Great Recession peak.

Student loans outstanding rose by 4.9% in Q2 compared to Q2 2018. Student debt now totals $1.61 trillion. Student loans outstanding have increased by 125% in the decade since Q2 2009. Meanwhile, student enrollment in colleges and universities has dropped 7% between 2010 and 2017, according to the National Center for Educational Statistics.

Meanwhile, bankruptcies are increasing. While still well-below Great Recession, analysts say there is an uptrend. According to data released last week by the American Bankruptcy Institute, US bankruptcy filings rose by 3% in July 2019 from July 2018.

As WolfStreet pointed out, every penny of this borrowing is reflected in annualized consumer spending, which was up by about 1.4%.

Consumer spending accounts for nearly 70% of the economy, as measured by GDP. Everyone and everything depends on these consumers to consume, which is their function. That’s why they’re called ‘consumers,’ and not ‘people.'”

Yup. The economy is “great.” Until those credit cards max out.