Consumers Spending Binge In Nov/Dec: Implications

According to a report from the Federal Reserve released earlier this month, Americans went on a spending and debt binge in November and December 2017 to a degree unprecedented in decades.

Forecasters have been hoping for signs of an economic breakout following eight years of sub-2% GDP growth under Obama, and the strong upturn in November and December of last year would appear to qualify as one.

The Fed’s latest report on Nov/Dec consumer spending has reinforced predictions of 4-5% GDP growth this year. Yet one question is whether the strong upturn in spending in Nov/Dec pulled demand forward that otherwise would have occurred in the 1Q of this year. As I reported on January 23, consumers drew down their savings rate to the lowest level (2.9%) since 2007 in the last two months of 2017.

The other figure that is important is the huge increase in credit card debt in Nov/Dec last year. In early January, the Fed estimated that revolving consumer credit balances rose by $11. 2 billion last November. But with this month’s update based on more data, the Fed hiked the November estimate to a whopping $24.8 billion, the largest monthly increase since 1968 when credit cards first burst onto the scene.

In the latest report, the Fed estimated that consumers did it again in December when revolving credit balances exploded by another $25.8 billion. That two-month total of $50.6 billion isn’t just the largest expansion of credit card debt; it’s way out of line with anything we’ve seen for decades.

In percentage terms, it was an astounding 5.2% increase in just those two months. The last time revolving credit rose by anywhere near the same proportions in two consecutive months was in August and September 1995 (+4.9%). Before that, it was May and June 1984 (+6.0%).

The 1995 and 1984 spending episodes occurred after recessions when the economy was entering dynamic recoveries. The current recovery, which is just starting to accelerate, is over eight years old and as noted above, household savings are the lowest in a decade. This is not reassuring.

The average individual American had outstanding credit card debt of $6,375 at the end of last year, up 3% from the previous year. The average household in America had credit card debt of $15,654 at the end of last year. Total credit card debt reached its highest point ever, surpassing $1 trillion, according to the Fed.

A third (33%) of Americans who have ever had credit card debt said that spending on necessities their income couldn’t cover contributed to their credit card debt balances. Yet about two in five Americans (41%) reported that spending more than they could afford on unnecessary purchases contributed to them going into credit card debt, according to NerdWallet which tracks credit card use and household debt.

Here is a look at our total outstanding consumer debt which was at an all-time high as of the 3Q of last year. The good news is that most of it is in home mortgages; the bad news is that most of the remainder is in high interest-bearing loans like credit cards.

The question is, why did most Americans increase their debt so rapidly in the final two months of last year? Some argue that Americans were just pre-spending their forthcoming tax cuts. I find that argument unlikely since plenty of surveys late last year and earlier this year found that a majority of Americans were opposed to the tax cuts (although that is changing of late).

My theory is that millions of Americans were pleased that Hillary lost the election, and that the Obama era of sub-2% economic growth, tax increases, over-regulation and stagnant wages would be coming to an end.  Maybe they weren’t crazy about Donald Trump personally, but I believe many were optimistic that his pro-growth policies would help.

I also think many Americans had reasons to believe that wages would go up in the New Year. There was optimism that corporations would use some of their newfound profits to increase wages and/or give bonuses this year. The latest unemployment report for January revealed that wages grew at the fastest pace in eight years, and hundreds of major corporations announced new bonuses for their employees.

At the end of the day, it remains to be seen if consumers can continue the Nov/Dec rate of spending this year. I am doubtful, especially with the savings rate the lowest in over a decade. I maintain that the economy can grow by 3% this year, but I continue to doubt claims that GDP will soar by 4-5% in 2018.

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