Consumer credit continues to decrease. WSJ reports:
Consumer lending shrank 1.7% in October, the ninth consecutive drop, extending the dramatic decline of financing available to help fuel the U.S. economy.Until the recent crisis, consumer credit had exploded, now accounting for ~17% of nominal GDP, about twice the level from 50 years ago. All in, household debt is now more than 120% of GDP, twice the the level of just 25 years ago.
The $3.5 billion decline, calculated by the Federal Reserve, caps a 4% drop in consumer lending from its July 2008 peak. Before then, borrowing by U.S. consumers -- including credit-card debt and auto loans, but excluding mortgages -- had been growing for more than a half-century.
Consumer activity accounts for about two-thirds of U.S. economic growth. Curtailed lending to consumers could hurt the chances for a strong recovery.
At some point this trend NEEDS to reverse course. Can it grow again before doing so? Sure, but that would push the level to a level even more unsustainable (and painful to correct).
So... if it were to change course, there are two ways this can happen:
- Option 1a: Decrease the numerator (consumer credit outstanding) via reduced borrowing
- Option 1b: Decrease the numerator (consumer credit outstanding) via default
- Option 2a: Increase the denominator (nominal GDP) via true growth (i.e. real GDP)
- Option 2b: Increase the denominator (nominal GDP) via inflation
Long Term Trend
So deleveraging or inflation? I know the preference by policy makers, but it is awfully hard to get inflation in the face of a deleveraging consumer.
Source: Federal Reserve / BEA