Consumer debt continues to climb and break records every month. But the pace of borrowing slowed in March, a possible red flag for the US economy.
Total consumer debt rose $10.3 billion in March, hitting a record-setting total of $4.05 trillion, according to the latest report by the Federal Reserve.
Through the first quarter of 2019, American indebtedness increased at a 4.25% annual rate. But the March increase came in at just only 3.1% and ranked as the smallest consumer debt increase in nine months.
The consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt.
Americans kept their credit cards in their wallets in March. Revolving credit, primarily credit card debt, fell by 2.18 billion (2.5%) in March after a gain of 3.5% in February. It was the second drop in credit card debt in four months.
Non-revolving credit, which includes auto and student loans, grew by $12.5 billion. Americans now have nearly $3 trillion in outstanding student loans.
You might think that the slowing pace of consumer borrowing is a good thing given the record debt burden carried by American consumers. But this isn’t necessarily the case when the entire economy is built on borrowing. 24/7 Wall Street called it a “double-edged sword.”
“The more borrowings are outstanding means the more burdened the consumer is with debt. Then again, if they aren’t buying on credit then they it is also assumed they are buying less in general … Close to 70% of GDP is tied back to consumer spending — and it is hard to feel great about this trend considering that the Commerce Department’s first estimate for first-quarter GDP was unexpectedly above 3% and considering that unemployment is at the lowest level in 50 years.”
Peter Schiff noted the big retrenchment in credit card use in his last podcast.
“That makes sense to me because everybody is tapped out. I’m seeing all the evidence that the consumer is at the end of the line here, that they’ve borrowed about as much as they can. And while it’s a good thing that consumers are borrowing less, it’s not a good thing from the Fed’s perspective because the Fed wants the consumer to keep spending. And since the consumer has a lousy income, their wages have been stagnant while the cost of living has been going up, and they’re loaded up with so much debt based on all the stuff they bought in the past that they really couldn’t afford, the only way to keep spending in the future is if they continue to borrow money.”
This may well influence the Federal Reserve’s thinking as it considers the possibility of rate cuts down the road. Although the current stance is “patient,” and Jerome Powell indicated he doesn’t see any rate cuts or hikes in the near future, the central bank may well end up needing to push rates lower in order to keep the borrowing train on the tracks. That’s the whole point of loose monetary policy and it helps explain the “Powell Pause.” The Fed simply can’t raise interest rates to anything resembling normal with Americans making payments on over $4 trillion in debt.
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