via moneymetals:
Can you borrow your way to prosperity?
American consumers are certainly giving it the old college try.
Consumer debt surged once again in January, rising by $19.5 billion, according to the latest data from the Federal Reserve.
On an annual basis, consumer debt rose by 4.7 percent to a record $5.04 trillion. The jump was double the projection.
The Federal Reserve consumer debt figures include credit card debt, student loans, and auto loans, but do not factor in mortgage debt. When you include mortgages, U.S. households are buried under a record level of debt. As of the end of 2023, total household debt stood at $17.5 trillion.
Pundits and policymakers keep talking about how “strong, resilient American consumers” are keeping the economy rolling. But they’re making ends meet with credit cards. This doesn’t seem like a sustainable economic growth plan.
Revolving debt, primarily reflecting credit card balances, grew by 7.6 percent in January as Americans added another 8.4 billion to their credit card bills. American consumers are now buried under a record $1.33 trillion in revolving debt.
To put the percentage increase into perspective, the annual increase prior to the pandemic in 2019 was 3.6 percent.
The bigger problem is the double whammy of rising debt and interest rates. Average credit card interest rates eclipsed the previous record high of 17.87 percent months ago. The average annual percentage rate (APR) currently stands at 20.75 percent, with some companies charging rates as high as 28 percent.
That underscores the fundamental problem of running an economy on credit. It’s expensive and credit cards have an inconvenient thing called a limit.
We’re already seeing consumers laboring under the strain of rising debt levels. According to the New York Fed, delinquencies increased in every debt category during the fourth quarter of 2023, with about 8.5 percent of credit card balances in delinquency.
“Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels,” said Wilbert van der Klaauw, economic research advisor at the New York Fed. “This signals increased financial stress, especially among younger and lower-income households.”
It’s also putting strain on banks. The net charge-off rate on credit card loans came in at 4.15 percent as of the end of 2023. It was the highest rate for this portfolio reported by the banking industry since the first quarter of 2012.
Non-revolving debt, primarily made up of auto loans, student loans, and loans for other durable goods, also showed a sharp increase in January, rising by 3.6 percent to $3.71 trillion.
Borrowing for big-ticket items has plunged in recent months. In December, non-revolving credit contracted. The January increase is significant compared to recent months but remains below the historical average of 5 percent growth before the pandemic.
The recent slowdown in non-revolving credit indicates consumers have cut back spending on big-ticket items. That could signal that the economy is slipping toward a recession even as Americans continue to run up high-interest debt on their credit cards.
So, the next time you hear President Biden, Fed Chair J. Powell, or some talking head bragging about the impressive economic growth, don’t forget about the billions of dollars Americans are borrowing to buy it.
There’s a word for this – unsustainable.
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