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Yellen’s America Is Facing a $13 Trillion Consumer Debt Hangover

This is a syndicated repost courtesy of Confounded Interest. To view original, click here. Reposted with permission.

Actually, the title of the Bloomberg article was Trumps’s America Is Facing a $13 Trillion Consumer Debt Hangover, but that was a misleading title. Trump has only been President since January and household debt growth has been growing (again) since 2012.

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Bloomberg – Matt Scully – After bingeing on credit for a half decade, U.S. consumers may finally be feeling the hangover. 

Americans faced with lackluster income growth have been financing more of their spending with debt instead. There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes. Household borrowings have surged to a record $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters. And with economic optimism having lifted borrowing rates since the election and the Federal Reserve expected to hike further, it’s getting more expensive for borrowers to refinance.

Some companies are growing worried about their customers. Public Storage said in April that more of its self-storage customers now seem to be under stress. Credit card lenders including Synchrony Financial and Capital One Financial Corp. are setting aside more money to cover bad loans. Consumer product makers including Nestle SA posted slower sales growth last quarter, particularly in the U.S. 

Companies may have reason to be concerned. Consumer spending notched its weakest gain in the first quarter since the end of 2009, a problem in an economy where consumers account for 70 percent of spending, though analysts expect the dip to be transitory. And debt delinquencies are rising even as the job market shows signs of strength.

Of course, The Federal Reserve has orchestrated the household debt growth by 1) setting the target for short-term interest rates to near zero and 2) purchasing trillions of dollars of Treasury notes and Agency MBS in order to lower mid section of the Treasury yield curve. And wage growth has not returned to levels seen during or just before The Great Recession.

Household debt is now higher than it was at the peak BEFORE The Great Recession.

And bank deposit rates are low, encouraging dissavings.

At least we may see an increase in bank deposit rates when the FOMC raises The Fed Funds Target rate at the June 14th meeting. Or at least there is a 92.7% probability of another rate hike.

Slow wage growth and super-low interest rates are a bad combo for household debt growth. That’s a big swing and a miss for the Berkeley slugger.

 

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