Contact

A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

All Reports

 
Feb 14 2018

Consumers Risk Overdosing on Credit

The full version of this report was released to ECRI clients on Feb. 7, 2018 -

Through ECRI’s research, we are able to distinguish between cyclical and structural forces impacting economic growth. Underlying the cyclical weakness evident in the latest retail sales data, one important structural trend that we have observed over the years is that American consumers have become ever more reliant on credit to finance their expenditures.



The chart shows three key sources of money that consumers rely on to finance purchases – personal income, non-revolving credit, and revolving credit.

While personal income remains the main funding source, its importance has actually decreased over time. That decline began in the early 1990s, but has seen a renewed downturn since 2012 (top line).

Meanwhile, from its late 1992 low, the share of non-revolving credit, which is comprised mostly of motor vehicle and education loans, has been steadily trending up, except for a stretch of stability around the Great Recession (middle line).

The share of revolving debt, which had risen sharply following the widespread introduction of credit cards, stabilized from the early 1990s until the financial crisis (bottom line). Thereafter, it declined sharply before bottoming out in 2015. Notably, its share has only recently started to recover.
 
With the shares of both types of credit now rising in tandem, the personal-income share of consumer spending has fallen to a record low. This sets up a situation where the reliance on credit to finance purchases could lead to a rude awakening if incomes do not rise apace. Of course, higher interest rates would also increase the debt servicing burden of already-stretched consumers.

Click here to review ECRI’s track record, including member report excerpts.

For more information on ECRI professional services please contact us.

Related News & Events

Bond quality spread confirming looming economic slowdown

CNBC February 13, 2018

ECRI sees 2018 economic slowdown on tap, and bond market quality spreads agree. More

 

Up is Down: Jump in AHE Growth Confirms Economic Slowdown

ECRI February 2, 2018

January wage growth jumped for an unwelcome reason: growth in hours fell faster than pay growth. More

 

Trump's Tax Cuts Won't Offset the Impending Slowdown

Bloomberg January 25, 2018

Everyone's too optimistic about 2018. More

 

27th Annual Minsky Conference

Levy Economics Institute April 17, 2018

On April 17, Lakshman Achuthan will present at the Levy Institute's 27th Annual Minsky Conference.

 

Related Reports