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Indebted US Consumers Losing Confidence

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With debt up to his eyeball, the US consumer seems to be losing confidence in the US economy.

Last month, Spencer Schiff wrote an article warning about declining consumer confidence, writing, “any shift in consumer psychology/behavior could knock a critical support out from under our economy.”

In fact, consumer spending makes up about 70% of US GDP. If Americans stop shopping, the economy grinds to a halt.

Meanwhile, consumer debt continues to skyrocket. In effect, US consumers are propping up the US economy with money they don’t have.

Total consumer debt in the US now stands at a record $4.123 trillion (seasonally adjusted). In July (most recent data) Americans added another $10 billion to their credit card balances. It was the biggest jump in credit card debt since November 2017. Americans now owe some $1.o8 trillion on their credit cards.

Most mainstream pundits and analysts continue to spin the growth in American indebtedness as a positive for the economy. Here’s how Bloomberg reported it.

The surge in borrowing indicates Americans, supported by higher wages, were feeling confident enough about their financial situation to continue borrowing and spending. The economy, beset by weakness in manufacturing, housing and capital investment, remains highly dependent on the US consumer to keep driving the expansion.”

But does massive credit card spending really mean consumers are confident? Because based on the latest numbers, it doesn’t appear they are confident at all.

In fact, consumer confidence plunged in September. It was the biggest drop in nine months. The Conference Board index of consumer attitudes fell to 125.1, from a downwardly-revised 134.2 the month before. Analysts blame “the escalation in trade and tariff tensions” that we saw at the end of August. But the trade war has been going on for months. Could there be other reasons for this drop in confidence? Could it be because they are getting closer to maxing out those credit cards?

Credit card spending doesn’t necessarily mean consumers are confident about the future. It could just as well mean they are tapped out and charging everyday purchases on plastic. In fact, the growth in consumer debt could just as well mean Americans are struggling to make ends meet. After all, a lot of people use their credit cards as an emergency fund.

Even if the US economy has experienced some kind of confidence-driven spending spree, it can’t go on forever. Credit cards have this inconvenient thing called a limit. And they have to be paid off at some point. At best, “confident” American consumers are borrowing money from their future. What happens when the future gets here?

As Spencer wrote, “It may soon become apparent that consumer spending, currently our primary recession deterrent, has ground to a halt. If so, a serious economic downturn awaits.”

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