Americans are buying stuff. Retail sales were stronger than expected in June. Auto sales increased by 0.7% after a similar rise in May, helping boost total retail spending. Overall, retail sales were up 0.4% last month. The Commerce Department revised May sales down from 0.5% to 0.4%.
Increasing retail sales would seem to be a good sign for the economy, but the latest consumer credit numbers reveal an underlying problem. Americans are buying a lot of this stuff on credit. How long can consumers keep running up credit cards before the bubble bursts?
As we reported last week, consumer debt continues to break records month after month. Americans owe over $4.3 trillion dollars in revolving debt (primarily credit cards), student loans and auto loans. When you factor in mortgages, the number climbs to $13.54 trillion. That figure was $869 billion higher than the previous peak of $12.68 trillion in the third quarter of 2008 (right before the crash) and 21.4% above the post-financial-crisis trough reached in the second quarter of 2013.
But many mainstream analysts downplay this surge in debt. And on the surface, the numbers do seem to indicate the risk isn’t as big as it was prior to the 2008 financial crisis. But as Wolf Richter explains, the averages conceal a different reality.
Americans have loaded themselves down with debt and some are struggling to pay the bill.
Total household debt hit a record $13 trillion in 2017, eclipsing levels seen on the eve of the Great Recession. Americans have been burning up the credit cards. Revolving debt grew by $26 billion in the fourth quarter of 2017 alone, a 3.2% increase. Americans have run up a nearly $1 trillion credit card tab. Meanwhile, flows into serious delinquency have increased steadily since the third quarter of 2016.
The delinquency level for subprime credit cards is particularly concerning, having risen to a level higher than at the peak of the financial crisis.
The Federal Reserve nudged up interest rates another .25 points last week. Of course, nobody was surprise by the central bank’s move. It was widely expected. Nevertheless, the Fed’s latest policy move has everybody bullish on increasing rates into the future
Of course, nothing has fundamentally changed. As Paul Singer said earlier this month, the financial system is no more sound than it was in 2008. All of this talk about rate hikes will vanish like a vapor if actual economic data continues to point toward a slowdown.
But since everybody is talking rate hikes right now, this is probably a good time to consider just how rising interest rates will effect your wallet.
The debt time bomb continues to tick. There is growing evidence that we’re getting close to an explosion.
And what do we have to show for trillions in borrowing?
Not a whole lot.
A Bloomberg article published this week proclaimed America has a debt hangover resulting from a half decade of “binging on credit.” The percentage of overdue debt has risen two straight quarters and consumer companies say customers are under stress. On top of that, bankruptcies are rising.