Americans Continue to Pile on More and More Debt

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Americans Continue to Pile on More and More Debt (https_schiffgold.com)

American consumers continue to cope with rising prices and prop up the sagging economy using their credit cards.

Total consumer debt rose another $23.8 billion in July to a record $4.644 trillion, according to the latest data from the Federal Reserve.

On an annual basis, consumer debt rose by 6.2%, moderating somewhat from the last few months as the CPI cooled thanks to a drop in energy prices.

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, US consumers are buried under more than $16.2 trillion in debt.

Consumer credit grew by an average of $30 billion per month through the first seven months of the year.

Americans are burning up their plastic in order to make ends meet. Revolving credit, primarily reflecting credit card debt, rose by another $10.9 billion, an 11.6% annual increase. 

To put that into perspective, the annual increase in 2019, prior to the pandemic was 3.6%. It’s pretty clear that with stimulus money long gone, Americans have turned to plastic in order to make ends meet as prices continue to skyrocket.

Revolving debt now stands at $1.137 trillion — above the pre-pandemic record.

Americans, by and large, kept their credit cards in their wallets and paid down balances at the height of the pandemic in 2020. This is typical consumer behavior during an economic downturn and the trend was even more pronounced with pandemic stimulus checks. Credit card balances were over $1 trillion when the pandemic began. 

They fell below that level in 2020 with an 11.2% drop. We saw small upticks in credit card balances in February and March of last year as the recovery began, with a sharp drop in April as another round of stimulus checks rolled out. But Americans started borrowing in earnest again in May 2021. Since then, we’ve seen a steady increase in consumer debt.

Not only are credit card balances growing; consumers are trying to find ways to borrow even more. According to Fed data, Americans opened 233 million new credit card accounts in the second quarter of this year. That was the largest number of new accounts opened in a single quarter since 2008 – the beginning of the Great Recession.

Aggregate limits on credit card accounts increased by $100 billion in Q2 and now stand at $4.22 trillion. That reflects the largest increase in more than 10 years.

Meanwhile, average credit card interest rates have eclipsed the record high of 17.87% set in April 2019. The average annual percentage rates (APR) currently stand at 18.03%. That’s up from 17.5% just a month ago.

The central bank is expected to push rates up another 50 to 75 basis points during its September meeting.

This is bad news for Americans depending on credit to pay their bills. With interest rates rising, Americans are paying higher and higher interest charges every month with minimum payments rising. With every Federal Reserve interest rate increase, the cost of borrowing will go up more, putting a further squeeze on American consumers.

Non-revolving credit charted a healthy jump in July, increasing by $12.9 billion, an 4.4% year-on-year jump. This includes auto loans and student loans. Total non-revolving credit now stands at $3.508 trillion.

For months, the mainstream has told us the massive growth in debt was a sign of economic health. Last month, MarketWatch reported, “How much credit households use is seen as a good window into the strength of the economy. Consumers tend to borrow more when times are good and cut back when the economy is weak.” Meanwhile. Fed chair Jerome Powell keeps telling us that “households are in very strong financial shape.” With the growth in debt moderating somewhat (although still high) does this mean the economy is getting shaky?

You probably won’t hear that narrative from the mainstream. But any slowdown in spending is bad news for an economy that relies on people buying stuff. Of course, the slowing of the debt increase likely just reflects slightly lower energy prices in July and not any real change in consumer spending.

The bottom line is that Americans continue to borrow at an excessive rate because they don’t have any other way to make ends meet. People don’t run up their Visa balance month after month to buy groceries when they are in “very strong” financial shape. 

The stimulus checks are long gone. Savings are being depleted. The average person has no choice but to pull out the plastic. Of course, this is not a sustainable trajectory. A credit card has this inconvenient thing called a limit.