U.S. Consumer Debt Increases Nearly $4.1 Trillion

Written by Jennifer Clark
Posted July 10, 2019

It seems as if Americans are feeling optimistic about the economy and have been spending money despite the negative economic outlook from analysts. On Monday, the Federal Reserve reported that consumer credit, which measures outstanding non-mortgage debt, had increased 5% to $4.1 trillion in May. 

This growth usually shows Americans are feeling optimistic and aren’t too worried about what they're spending — meaning a positive outlook for consumer spending. And a positive outlook for consumer spending is a positive outlook for the economy, since consumer spending consists of two-thirds of economic activity. 

Retail sales grew for the third straight month in May, despite economists' pessimistic outlook for growth in the U.S. Consumers are still spending, and that’s good news. Not to mention, we’re experiencing a strong labor market along with elevated wage growth. 

The job market has been exceeding economist forecasts. Employers added 224,000 jobs in June despite a slow May. As more jobs get created, more people will feel secure in their spending and will want to spend. All of these crucial components have propelled U.S. economic expansion to the longest on record. 

A Cautionary Tale

However, according to the Federal Reserve, there are still an increasing number of credit card balances that have been coming closer to serious delinquency territory in the past few years. In addition, a record number of Americans have auto loans at least 90 days past due. It's good to see people spending money and paying off their debt, or at least having the ability to pay of their debt, but if they get too deep into debt it will become an even bigger issue that'll affect the economy. 

Economists Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw had this to say in a report in March:

The substantial and growing number of distressed borrowers suggests that not all Americans have benefited from the strong labor market and warrants continued monitoring and analysis of this sector. 

On the surface level, it may seem that jobs are up and that means Americans aren’t worried about spending money, which has been fueling the economy. But if we dig a little deeper, you might see a more worrisome issue lying below the surface.

Could the U.S. Be Headed in Volatility?

Fed Chair Jerome Powell will be a part of a two-day testimony before Congress this week. His testimony could lead to volatility in the markets. Powell is expected to make the case for rate cuts, but won’t be committing to when or how much the Fed will decide on. He believes it will be beneficial for the U.S. economy to cut interest rates. 

During the last Fed meeting, Powell spoke about how it’ll be necessary to cut rates to save the economy. He is concerned with the global economy and the effect trade wars would have over U.S. growth. Peter Boockvar, Chief Investment Officer at Bleakly Advisory Group, said:

He’s going to do his best to play both sides. If you’re testifying in front of Congress, you don’t want to tell Congress: ‘Things are slowing down, and I’m going to cut, cut, cut.’ He’s going to tell Congress the economy’s good, but there’s some pockets, and he’ll play up the idea of an insurance cut. Congress is his boss. You don’t want to tell the boss you’re behind the curve, and the December rate hike was a mistake.

Last December, the financial markets reacted badly to the December’s rate increase, and the financial markets only calmed down when the Fed decided to pause its hiking policy. The Fed is also under pressure from the president, who has been tweeting, calling the central bank America’s “most difficult problem.” While Powell and his colleagues say they are ignoring politics when making decisions, it’s still difficult for the Fed to make the decision it needs without creating some type of turmoil.

Powell’s testimony this Wednesday and Thursday will give us more of an idea of where the U.S. economy and markets will be headed.

Until next time,

Jennifer Clark
Pro Trader Today

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