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Consumer debt is up, savings are down

While economists vary on the date of the next recession, practical credit policy managers should think it will be sooner rather than later.

The New York Times notes that the World Bank indicates that “Global growth will be stifled by inflation and war.”

Global growth is expected to slow to 2.9% this year from 5.7% in 2021. The outlook, presented in the bank’s Global Economic Outlook report, is not only gloomier than that produced six months ago , before Russia invaded Ukraine, but also below 3.6%. percentage forecast in April by the International Monetary Fund.

And expect to see a difficult climate for the rest of the decade, that is to say the next 7 years.

Growth should remain moderate next year. And for the rest of this decade, it is expected to fall below the average reached in the previous decade.

In some ways, the bank said, the economic threats mirror those of the 1970s, when spiraling oil shocks followed by rising interest rates caused crippling stagflation or a menacing combination of soaring prices and low growth.

Here in the United States, two metrics to watch are the growth in debt and the shortfall in consumer savings.

Data released by the Federal Reserve on June 7 indicates that revolving debt is setting new records. There are two ways to look at revolving debt: seasonally adjusted and unadjusted.

Unadjusted is an overview of debt. It tracks the seasonally adjusted figure because the adjustment smooths out peaks and troughs in how consumers spend. Winter holidays, for example, increase consumer spending, so volumes tend to peak. In contrast, the unadjusted figures simply indicate the actual amounts. According to the latest report, revolving credit card debt peaked at $1.1 trillion with seasonal adjustment and $1.0 trillion without seasonal adjustment.

Non-revolving debt, which includes car loans, installment loans and student debt, was three times that amount, reaching $3.5 trillion, up $20 billion from the previous month.

In an environment where we have 8% inflation in the US, expect more debt to pile up. The increase in volume will likely come from credit cards as consumers struggle with gas and groceries, but keep tabs on installment loans as consumers consolidate debt with cheaper interest rates ( but increasing). (For more information on installment debt in the United States, see this Mercator report.)

Now think about the savings. Here it is obvious that the party is over.

Dating back to the 1960s, when Americans saved about ten percent of their income, the metric has dropped in modern times. In February 1960, the measure was a personal savings rate of 10.6%. In February 1991, the number was 8.8%. Trends dipped in 2005 to just 2.7%, then peaked during the COVID-19 era as consumer bank accounts filled with relief funds, at a whopping 24.8% in May 2020. The latest metric published by the Federal Reserve for April 2022 stands at 4.4%, indicating that Americans have exhausted their savings.

That is why Jamie Dimon, CEO of Chase, suggested“You better get ready,” Dimon told the room full of analysts and investors. “JPMorgan is preparing and we are going to be very conservative with our balance sheet.”

I would go with Jamie on this one. Credit policy makers need to start shrinking loan portfolios, especially credit cards, early in the storm. And on the face of it, there will be a long tail on this recession.

Preview by Brian RileyDirector, Credit Advisory Services at Groupe Conseil Mercator