Consumers Take Out Gobs Of Debt

Credit Card Debt Is Over $1 Trillion

The consumer is at a crossroad. If wage growth accelerates in 2018, everything will be fine, but if the economy turns south, the consumer will be in a world of hurt. Some readers might say that if the economy goes south, the consumer will always be in pain. While that’s true, the amount of pain depends on the savings rate and the debt incurred. If a recession had occurred in 2012, there wouldn’t be as much pain as a recession that happens in 2018 because there’s more debt. It’s the same situation when we looked at valuations. Sure, when the momentum in the stock market falters, it’s bad. However, if you start at a more expensive point, then there’s further to fall. If margins start at a record high, there’s a long way to fall to get to the long term average. Momentum matters when it comes to timing the market. Factors such as consumer debt, profit margins and valuations effect how far the fall is.

To give a personal example, if someone loses their job with $10,000 in credit card debt, it’s a much worse situation then someone who loses their job when they have no debt. Both are bad, but the situation with the debt is dire. Momentum covers for everything until the tide goes out and we see who was living above their means. Recessions are equalizers in the sense that they reward people and businesses who are conservative. If the momentum were to continue forever, the best position would always be to be aggressive.

The chart below shows how the revolving credit outstanding for consumers has reached $1 trillion for the first time since the financial crisis. The last recession was a tough deleveraging. The big advantage the consumer has this time around is far fewer took out mortgages they couldn’t afford. The next recession probably won’t be as bad as the last one because of this. The one caveat to that is if interest rates rise significantly, the consumer could be hit hard. Getting back to the September consumer credit report, the total credit rose $20.8 billion which is a 6.6% annualized growth rate. Non-revolving debt outstanding went up by $14.4 billion. Revolving credit increased $6.4 billion which is the biggest gain in 4 months.