“Have US and UK consumers read the (recession) script?”

1Q23 consumer credit flows still above pre-COVID levels

The key chart

Quarterly US and UK consumer credit flows expressed as a multiple of pre-pandemic average flows (Source: FRED; BoE)

The key message

Have US and UK consumers read the (recession) script?

Despite rising borrowing costs, quarterly consumer credit flows in 1Q23 remained well above pre-pandemic levels, helped by a recovery in monthly flows in March 2023. The message from the US and UK money sectors in 1Q23 was more positive for consumer demand and growth, but more problematic for Chair Powell and Governor Bailey…

US consumer credit totalled $65bn in 1Q23, down from $87bn and $84bn in 4Q22 and 3Q22 respectively but still 1.5x the pre-pandemic average quarterly flow of $45bn (see key chart above). The monthly flow in March 2023 rose to $27bn, from $15bn in February 2023, and was 1.8x the pre-pandemic average flow of $15bn or 1.5x on a 3m MVA basis (see chart below).

UK consumer credit totalled £4.7bn in 1Q23, up from £3.2bn and £3.3bn in $Q22 and 3Q22 respectively, and 1.3x the pre-pandemic average quarterly flow of £3.6bn (see key chart above). The monthly flow in March 2023 rose to £1.6bn, from £1.5bn in February 2023, and was 1.6x the pre-pandemic average of £1.2bn or 1.3x on a 3m MVA basis (see chart below).

Monthly consumer credit flows (3m MVA) expressed as a multiple of pre-pandemic average flows (Source: FRED; BoE)

The Federal Reserve and the Bank of England continue to face delicate balancing acts between reducing inflation (their core mandate) and weaker growth. Higher interest rates are supposed to deter borrowing and hence reduce aggregate demand and inflation. At the same, increased borrowing is one way that households can offset the pressures of falling real incomes.

In this context, the message from the US and UK money sectors in 1Q23 was more positive for consumer demand and growth, but more problematic for Chair Powell and Governor Bailey…

Please note that the summary comments and charts above are abstracts from more detailed research that is available separately.

“Clues from consumer credit III”

Converging messages but different sub plots

The key chart

Monthly consumer credit flows as a multiple (x) of pre-pandemic average flows (Source: FRED; BoE; CMMP)

The key message

The messages from the US, UK and euro area (EA) money sectors are converging around a common theme – downside risks to household (HH) consumption and economic growth.

The consumer credit dynamics behind these messages remain very different, however – sharply slowing demand in the US, surprisingly resilient demand in the UK, and consistently subdued demand in the EA (see key chart above).

The Federal Reserve, Bank of England (BoE) and European Central Bank (ECB) face delicate balancing acts between reducing inflation (their core mandates) and weaker growth. Higher interest rates are supposed to deter borrowing and hence reduce aggregate demand and inflation. At the same time, increased borrowing is one way that households (HHs) can offset the pressures of falling real incomes. How is this playing out so far, in 1Q23?

Demand for consumer credit remains slightly above pre-pandemic levels in both the US and the UK suggesting that risks towards more persistent inflation remain. The very rapid pace of adjustment in US consumer credit demand complicates matters, however, and suggests that Chair Powell may have a more challenging task here than Governor Bailey. In contrast, consistently subdued EA consumer credit demand suggest that the risks to the ECB’s balancing act lie more towards weaker growth/recession. An altogether different challenge for President Lagarde, the subject of my next post…

Clues from consumer credit III

Monthly consumer credit flows tell us a great deal about the relative strength of the US, UK and EA economies and the risks associated with growth. The immediate response of HHs in the US, UK and EA was consistent – they all repaid consumer credit. The subsequent responses were anything but consistent, however (for background see “Clues from consumer credit”, November 2022).

US dynamics

Trends in US monthly consumer credit flows ($bn) (Source: FRED; CMMP)

Between March 2022 and December 2022, monthly flows of US consumer credit were more than double their pre-pandemic average. Back in November 2022, I suggested that the risks to the US growth outlook lay in the sustainability of these flows in the face of rising borrowing costs. In the first two months of 2023, these flows slowed sharply to 1.6x and 1.1x pre-pandemic averages (see chart above). In short, demand for consumer credit is moderating sharply rather than collapsing, at least so far.

UK dynamics

Trends in UK monthly consumer credit flows (£bn) (Source: BoE; CMMP)

UK demand for consumer credit has been surprisingly resilient. Over the past twelve months, monthly flows have remained close to their pre-pandemic average level of £1.2bn. The 3m MVA of monthly flows was 1.1x the pre-pandemic average in both January and February 2023, up from 0.7x in October 2022 (see chart above).

EA dynamics

Trends in EA monthly consumer credit flows (EURbn) (Source: ECB; CMMP)

The theme in the EA has been one of consistently subdued demand for consumer credit. The 3m MVA flow fell to €1.1bn in February 2023, down from €1.2bn in January, only 0.3x the pre-pandemic average flow (see chart above). The key message in the EA has been that consumer credit flows have failed to recover to their pre-pandemic levels, in contrast to trends observed in both the US and the UK.

Conclusion

The Federal Reserve, Bank of England (BoE) and the European Central Bank (ECB) face delicate balancing acts between reducing inflation (their core mandates) and weaker growth. Higher interest rates are supposed to deter borrowing and hence reduce aggregate demand and inflation. At the same time, increased borrowing is one way that households (HHs) can offset the pressures of falling real incomes. How is this playing out in 1Q23?

Demand for consumer credit remains slightly above pre-pandemic levels in both the US and the UK suggesting that risks towards more persistent inflation remain. The very rapid pace of adjustment in US consumer credit demand complicates matters, however, and suggests that Chair Powell may have a more challenging task here than Governor Bailey. In contrast, consistently subdued EA consumer credit demand suggest that the risks to the ECB’s balancing act lie more towards weaker growth/recession. An altogether different challenge for President Lagarde…

Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.

“Is the US consumer starting to crack? Part 2”

Not yet, but momentum is slow sharply

The key chart

Monthly trends in US consumer credit ($bn) (Source: FED; CMMP)

The key message

Is the US consumer starting to crack? The message from the US money sector is “no, not yet.” Demand for consumer credit is moderating sharply rather than collapsing, at least so far. Given the balance between the stock of consumer debt (high) and its affordability (average), it is reasonable to expect more of the same….

The US has experienced 30 consecutive months of positive monthly consumer credit flows since August 2020. According to latest data release, however, the monthly flow of consumer credit in February 2023 fell to just over $15bn, down from $19bn in January (revised up) and down from its recent peak of $37bn in October 2022.

Nonetheless, February’s monthly flow was still slightly above the pre-pandemic average flow of just under $15bn – a sharp moderation not a collapse.

Current trends are consistent with two factors:

  • The consumer credit to disposable income ratio (25%) is at the upper end of its historic range, while…
  • …the consumer credit debt service payment ratio (6%) is only in-line with its historic average since 1980

In short, the stock of consumer debt is high in relation to disposable income, but the cost of servicing it is not.

Recall that in the face of pressures on disposable income, consumers have the option to borrow more, save less and/or consume less. Looking forward, it seems reasonable to expect further moderations in the demand for consumer credit and downward pressure on US consumption.

Whether we are seeing in a convergence in the messages from the US, UK and EA money sectors here, is the subject of the next post.

Is the US consumer starting to crack? Part 2

Last month, I noted that demand for consumer credit in the US was moderating sharply. I also argued that “while it is too early to conclude that the US consumer is cracking, it seems reasonable to expect further moderations in the demand for consumer credit, pressure on US consumption, and more convergence in the messages from the US, UK and EA money sectors in 2023”.

Monthly trends in US consumer credit ($bn) (Source: FED; CMMP)

The US has now experienced 30 consecutive months of positive monthly consumer credit flows since August 2020 (see chart above). The latest FED data release for February 2023 (published on 7 April 2023) showed an upward revision in January’s flow from $14.8bn to $19.5bn and then a fall to $15.3bn in February. This latest monthly flow remains above the pre-pandemic average flow of $14.9bn, but is well below October 2022’s recent peak of £36.9bn. The 3m MVA of monthly flows ($16.1bn) fell to 1.1x pre-pandemic flows (see chart below).

In short, momentum is slowing but the US consumer is not showing signs of cracking yet.

Monthly consumer credit flows (3m MVA) versus pre-pandemic average flows ($bn) (Source:FED; CMMP)

Consumer credit is the second largest financial liability of US households after mortgages. Over the past twenty years, it has displayed a relatively stable relationship with disposable personal income (DPI), trending between 21% and 26% of DPI (see chart below). A moderation in demand is consistent with the ratio being close to the upper end of its historic range (at 25% DPI).

Trends in the consumer credit / disposable personal income ratio (%) (Source: FED; CMMP)

The offsetting factor here is the cost of servicing consumer credit. The consumer credit debt service payment (DSP) to DPI ratio has risen from a recent low of 4.9% in 3Q21 to 5.7% in 4Q22, but this is only in-line with the long term average since 1980 (see chart below).

Trend in consumer debt service payment ratio (%) (Source: FED; CMMP)

Conclusion – expect more of the same

In the face of pressures on disposable income, consumers have the option to borrow more, save less and/or consume less. Looking forward it seems reasonable to expect further moderations in the demand for consumer credit and downward pressure on US consumption. Whether we are seeing in a convergence in the messages from the US, UK and EA money sectors here, is the subject of the next post.

Please note that the summary comments and charts above are abstracts from more detailed research that is available separately.

“Is the US consumer starting to crack?”

Demand for consumer credit is losing momentum

The key chart

Trends in monthly US consumer credit flows ($bn)
(Source: FED; CMMP)

The key message

The relative resilience of US consumers in relation to their UK and euro area (EA) peers has been an important theme in the post-pandemic “messages from the money sector.”

Monthly US consumer credit flows in December 2022 and January 2023 suggest, however, that demand for consumer credit is moderating sharply.

While it is too early to conclude that the US consumer is cracking, it seems reasonable to expect further moderations in the demand for consumer credit, pressure on US consumption, and more convergence in the messages from the US, UK and EA money sectors in 2023.

Is the US consumer starting to crack?

The US has experienced 29 consecutive months of positive monthly consumer credit flows since August 2020. The latest FED data release for January 2023 (published yesterday, 7 March 2008) showed a monthly flow of $14.8bn, up from $10.7bn in December 2022, but well below the $36.1bn flow recorded in November 2022, however.

The key point here is that the last two months’ flows were below the average pre-pandemic flow of $14.9bm (see key chart above). The 3m MVA of monthly flows ($20.5bn) is still above the pre-pandemic average, so too early to argue that the US consumer is cracking. At least not yet…

Recall that consumer credit is the second largest financial liability for US households (24% total) after mortgages (64% total) and that it displays a relatively stable relationship with disposable personal income. A moderation in demand for consumer credit is entirely consistent with the fact that the consumer credit/disposable personal income ratio is close to the upper end of its historic range at a time of rising rates. Hence, it is also reasonable to expect demand for consumer credit to moderate further, putting pressure on consumption in the process.

Monthly consumer credit flows as a multiple of pre-pandemic averages
(Source: FED; BoE; ECB; CMMP)

Recall also that in the face of pressures on real household disposable income, consumers have the option to borrow more, save less and/or consume less. In terms of borrowing more, monthly flows of consumer credit since January 2021 have highlighted the relative resilience of US consumers in relation to their UK and EA peers.

From an asset allocation perspective, it is important to see if the last two months’ trends continue to determine whether this relative resilience is sustainable or whether the messages from the three money sectors will converge further. More to follow in 1Q23…

Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.

“Risky US consumer credit dynamics?”

Assessing the state of the US consumer balance sheet

The key chart

Trends in the stock of US consumer credit ($tr) and the consumer credit to DPI ratio (%)
(Source: FED; CMMP)

The key message

What are the implications of buoyant US consumer credit flows for the state of household balance sheets?

Consumer credit is the second largest financial liability for US households (24% total) after mortgages (64% total). This structure has changed little over the past 20 years, although the relative importance of mortgages (up then down) and consumer credit (down then up) fluctuated in the interim period.

Consumer credit displays a relatively stable relationship with disposable personal income (DPI). The recent moderation in monthly credit flows is consistent with the consumer credit to DPI ratio being at high end of its narrow, historic range (at the end of 3Q22).

Mortgage debt, in contrast, displays a more volatile relationship with DPI. Importantly, the deleveraging of the US HH sector in the post-GFC period is due almost exclusively to a reduction in excess mortgage indebtedness. Consumer credit indebtedness is largely unchanged.

Two key messages here:

  1. It is reasonable to assume that the demand for consumer credit will continue to moderate, putting pressure on consumption in the process
  2. Overall HH sector risks associated with the level of indebtedness and affordability of debt remain more manageable than in the pre-GFC period

Recall that the US led advanced economies in the structural shift away from relatively high-risk HH debt towards relatively low-risk public debt in the post-GFC period.

More elevated HH debt risks can be found elsewhere…

Risky US consumer credit dynamics?

In my previous post, I noted that US consumers were doing their level best to counter the “US slowdown” narrative. While consumer credit demand has moderated from its recent highs, monthly flows in November 2022 were still almost double their pre-pandemic average flow. In response, I was asked what this means for the state of consumer balance sheets. This post provides a summary response.

How important is consumer credit?

Trends in stock of consumer credit broken down by type
(Source: FED; CMMP)

Consumer credit is the second largest financial liability for US households (24% total), after mortgage debt (64% total). The structure of financial liabilities has changed little over the past 20 years, although there has been important variations in the relative importance of mortgages (up then down) and consumer credit (down then up) during the interim period (see charts above and below).

Structure of US consumer credit (% total) over past 20 years
(Source: FED; CMMP)

What is the relationship with disposable personal income?

Trend in consumer credit / disposable personal income ratio (%)
(Source: FED; CMMP)

Consumer credit has also displayed a relative stable relationship with disposable personal income (DPI) over this period. The recent moderation in demand is consistent with the fact that the ratio was close to the upper end of its historic range at the end of 3Q22 (see chart above).

Trends in HH credit / disposable personable income ratio by type
(Source: FED; CMMP)

Mortgage demand, in contrast, has displayed a more volatile relationship with DPI over the period (see chart above). Indeed, the deleveraging of the HH sector in the post-GFC period is due almost exclusively to a reduction in mortgage indebtedness (see chart below). Consumer credit indebtedness is largely unchanged since the GFC.

Trends in HH credit / disposable personable income ratio by type
(Source: FED; CMMP)

Conclusion

Two key messages here:

  1. It is reasonable to assume that the demand for consumer credit will continue to moderate, putting pressure on consumption in the process
  2. Overall HH sector risks associated with the level of indebtedness and affordability of debt remain more manageable than in the pre-GFC period

Recall that the US led advanced economies in the structural shift away from relatively high-risk HH debt towards relatively low-risk public debt in the post-GFC period.

More elevated HH debt risks can be found elsewhere…

Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.

“US consumer credit demand and the slowdown narrative”

Consumer credit flows remain c.2x pre-pandemic average flows

The key chart

Trends in monthly US consumer credit demand (US$ bn)
(Source: FED; CMMP)

The key message

In the face of pressures on real household disposable income, consumers have the option to borrow more, save less and/or consumer less – or various combinations of all three. In terms of borrowing more, monthly flows of consumer credit continue to highlight the relative resilience of US consumers in relation to their UK and euro area (EA) peers. US consumers are doing their “level best” to counter the slowdown narrative (at least so far!).

US consumer credit demand and the slowdown narrative

The US has seen 27 consecutive months of positive monthly consumer credit flows since August 2020 (see key chart above). The latest FED data point for November 2022 (published yesterday, 9 January 2023) showed a monthly flow of $27bn (3m MVA). This was up on the $26bn flow in September 2022 but well below April 2022’s peak of $37bn. The key message here is that while demand for consumer credit is moderating it still remains almost double the average pre-pandemic flow of just under $15bn.

US, UK and EA consumer credit flows expressed as a multiple of pre-pandemic average flows (Source: FED; BoE; ECB; CMMP)

Monthly consumer credit flows also rebounded in the UK and the euro area between October and November 2022 but, in contrast to US trends, their respective flows were only 0.8x and 0.6x their pre-pandemic levels (see chart above). Note that in the EA, flows of consumer credit have still to recover to their pre-pandemic levels.

Conclusion

US consumers repaid less consumer credit in the pandemic period and have borrowed more in the post-pandemic period in relation to their UK and EA peers. While momentum is slowing in each region, the US is the only one where consumer credit remains above, indeed comfortably above, pre-pandemic levels.

US consumers are doing their “level best” to counter the slowdown narrative (at least so far!).

Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.

“Seven lessons from the money sector in 2022”

What have the “messages from the money sector” taught us?

The key chart

Visual summary of the CMMP framework linking all economic sectors together
(Source: CMMP)

The key message

The true value in analysing developments in global finance lies less in considering investments in banks’ equity and more in understanding the implications of the relationship between the money sector and the wider economy for macro policy, corporate strategy, investment decisions and asset allocation (see key chart above).

The 2022 “messages from the money sector” have taught us a great deal about macro policy (and its flaws), risks to financial stability and the transition from pandemic-economics to economic slowdown/recession in advanced economies.

Macro policy

Over the past twelve months, the money sector has reminded us that flawed macro thinking continues to drive macro policy in many advanced economies (lesson #1). The first flaw is to argue that governments (who enjoy monetary sovereignty) and households face the same spending and budgetary constraints. They do not. The second flaw is to largely ignore private sector debt. In a world that sees public debt as a problem but largely ignores private sector debt, it is common to overlook elevated private sector risks in Sweden, France, Korea, China and Canada (lesson #2). This is a mistake.

Financial stability risks

Among the sample of economies listed above, the banking sectors in China and Korea have the highest exposures to elevated private sector debt risks. Banks and investors share risks more equally in Sweden, France and Canada (lesson #3).

Rising levels of financial inequality are creating very real social, economic and political problems in many developed economies. Lower-income households have less flexibility to adjust their spending in response to rising prices and are less likely to have a cushion of savings to protect them. Does this justify sensational headlines about rising levels of consumer credit? Without playing down the genuine hardship that many are facing now, the answer is no (lesson #4).

Lower-income households hold relatively small shares of mortgage debt and consumer credit. Furthermore, a recovery in demand for consumer credit at the aggregate levels was a positive sign reflecting a normalisation of economic activity during 2022. This does not mean that complacency about rising NPLs is justified, however.

From pandemic-economics to economic slowdown/recession

Monetary cycles in the UK and EA have remained highly synchronised (despite Brexit) and pointed to a clear break from pandemic economics during 2022 (lesson #5).

Consumer credit is losing momentum, however, and sharply slowing real growth rates in money and credit point to slowdown/recession in 2023 (lesson #6).

The UK has already returned to the unsustainable world of pre-pandemic imbalances (lesson #7). The fact that this is an integral part of official forecasts returns us neatly to lesson #1 – flawed macro thinking drives current macro policy.

Thank you for reading and very best wishes for a very happy and healthy New Year

Seven lessons from the money sector in 2022

Lesson #1: flawed macro thinking drives macro policy

Trends in French debt ($bn) broken down by sector
(Source: BIS; CMMP)

Over the past twelve months, the money sector has reminded us that flawed macro thinking continues to drive macro policy in many advanced economies.

The first flaw argues that currency issuers (e.g. governments who enjoy monetary sovereignty) and currency users (e.g. households) face the same spending and budgetary. The second flaw sees public sector debt as a problem but largely ignores private sector debt.

Jeremy Hunt, the latest Chancellor of the Exchequer in the UK, argued recently that, “Families up and down the country have to balance their accounts at home and we must do the same as a government.” He was following in the well-trodden footsteps of Thatcher, Cameron, Osbourne and Sunak before him. In the past, this rhetoric and mistaken belief set was used to justify austerity policies (which had well-documented, negative impacts on UK growth). Such arguments reflect a flawed understanding of how modern monetary systems work. They also ignore the fact that the correct fiscal response is the one that balances the economy not the budget.

Back in February 2022, France’s state auditor sounded the alarm about the impact of pandemic spending on France’s widening budget deficit and rising debt levels (see chart above). The auditor was factually correct to highlight the impact of pandemic spending on the government’s net borrowing but the analysis fell short in three important respects. First, the net borrowing of the French government was a necessary, timely and appropriate response to the scale of the private sector’s net lending/disinvestment. Second, while the outstanding stock of French government debt may be the fourth highest in the world, France ranks much lower in terms of government indebtedness. Third, from a risk and financial stability perspective, CMMP analysis is more concerned about France’s private sector debt dynamics, particularly in the corporate sector (see Lesson #2).

Lesson #2: its a mistake to ignore private debt

Trends in selected economies’ private sector debt ratios (% GDP)
(Source: BIS; CMMP)

In a world that sees public debt as a problem but largely ignores private sector debt, it is common to overlook elevated private sector risks in Sweden, France, Korea, China and Canada. This is a mistake.

Why focus on Sweden, France, Korea, China and Canada?

First, their levels of private sector indebtedness exceed the “peak-bubble” level seen in Japan (214% GDP, 4Q94) and, in the cases of Sweden and France, the peak-bubble level seen in Spain (227% GDP, 2Q10) too. Potential warning sign #1.

Second, in contrast to other economies that exhibit high levels of private sector indebtedness (eg, the Netherlands, Denmark, and Norway) affordability risks are also elevated in these five highlighted economies. Their debt service ratios are not only high in absolute terms (>20% income), they are also elevated in relation to their respective 10-year, average affordability levels. Potential warning sign #2.

Note, finally, that among these five economies, Sweden, Korea and Canada have over-indebted NFC and HH sectors, while the risks in France and China relate more, but not exclusively, to their NFC sectors. When it comes to private sector debt dynamics, the world is far from a homogenous place.

Lesson #3: exposure of Chinese and Korean banks

Trends in selected bank credit ratios (% GDP)
(Source: BIS; CMMP)

Among the sample of economies listed above, the banking sectors in China and Korea have the highest exposures to elevated private sector debt risks. Banks and investors share risks more equally in Sweden, France and Canada.

In China, bank credit accounts for 84% of total private sector credit and the bank credit ratio of 184% GDP exceeds the peak-Spanish bank credit ratio of 168% GDP. Similarly, in Korea bank credit accounts for 73% of total private sector credit. The bank credit ratio of 161% GDP is slightly below the peak-Spain level but well above the peak-Japan level of 112%

In contrast, risks in Sweden, France and Canada are shared more equally between banks and investors (see chart above). Bank sector credit accounts for 51%, 50% and 49% of total private sector credit in Sweden, Canada and France respectively (reflecting the greater development of alternative sources of credit in advanced economies).This does not mean that banks are not exposed, however. The bank credit ratio in Sweden is 138% GDP, above the peak-Japan level. In France and Canada these ratios are the same or slightly below the peak-Japan level (112% GDP and 109% GDP respectively).

Lesson #4: the risks of rising financial inequality

Share of outstanding mortgages and consumer credit by UK income decile
(Source: BoE; CMMP)

Rising levels of financial inequality are creating very real social, economic and political problems in many developed economies. Lower-income households have less flexibility to adjust their spending in response to rising prices and are less likely to have a cushion of savings to protect them. Does this justify sensational headlines about rising levels of consumer credit? Without playing down the genuine hardship that many are facing now, the answer is no.

Lower-income households hold relatively small shares of mortgage and consumer credit in the UK and EA, for example. In the UK, the bottom-three income deciles account for 5% and 8% of the outstanding stock of mortgages and consumer credit respectively. Similarly in the euro area, the bottom-two income quintiles account for 13% of total household debt, albeit with significant variations at the country level. Furthermore, at the aggregate level, a recovery in demand for consumer credit is a positive sign reflecting a normalisation of economic activity rather than a sign of systemic stress/economic weakness.

This does not mean that complacency about rising NPLs is justified. According to the latest OBR forecasts, for example, the household debt servicing cost in the UK is set to rise from £60bn at the end of 4Q22 (3.8% of disposable income) to £107bn at the end of 4Q23 (6.6% of disposable income) and £125bn at the end of 4Q24 (7.5% of disposable income). Beyond that, the debt service ratio is assumed to stabilise at around 7.5% of disposable income. High but (perhaps conveniently?) below the 9.7% level seen at the time of the GFC.

Lesson #5: the break for pandemic-era economics

Trends in UK and EA broad money growth (% YoY)
(Source: BoE; ECB; CMMP)

Monetary cycles in the UK and EA have remained highly synchronised (despite Brexit) and pointed to a clear break from pandemic economics during 2022.

Pandemic-era economics was characterised by a spikes in broad money driven by the hoarding of cash by HHs and NFCs, subdued credit demand and a record desynchronization of money and credit cycles.

Broad money growth has slowed from a peak of 15.4% to 5.6% in the UK and from a peak of 12.5% to 5.1% in the EA. HHs and NFCs have stopped hoarding cash, monthly consumer credit flows have recovered and money and credit cycles have re-synched with each other. Mortgage demand, the key driver of so-called FIRE-based lending is also slowing, notably in the EA.

Lesson #6: lower consumer momentum and slower growth

Monthly consumer credit flows as a multiple of pre-pandemic average flows
(Source: FED; BoE; ECB; CMMP)

Consumer credit is losing momentum, however, and sharply slowing real growth rates in money and credit point to slowdown/recession in 2023.

Recall that in the face of falling real disposable incomes, HHs can either consume less, save less and/or borrow more – or a combination of these behaviours.

In relation to pre-COVID trends, US consumers repaid less consumer credit during the pandemic and have borrowed much more in the post-pandemic period than their UK and EA peers. Monthly flows of US consumer credit peaked at $45bn in March 2022 at 3x their pre-pandemic levels. According to the latest data release, they fell to $27bn in October 2022 but remain almost double pre-pandemic levels.

The messages from the respective money sectors is that downside risks to consumption remain more elevated in the EA and the UK where monthly consumer credit flows have already fallen back below pre-pandemic levels.

Real growth rates in M1, HH credit and NFC credit typically display leading, coincident and lagging relationships with real GDP. Each indicator is falling at an increasing rate in the UK and the EA. If historic relationships between these variables continue, this suggests a sharp deceleration in economic activity over the next quarters.

Lesson #7: the UK returns to the unsustainable pre-COVID world

Trends and forecasts for UK sector financial balances (% GDP)
(Source: OBR; CMMP)

The UK returned to the unsustainable world of pre-COVID economics with twin domestic sector deficits counterbalanced by significant current account deficits in 2022. The OBR expects these dynamics to continue throughout its forecast period to March 2028.

The good news for Jeremy Hunt, the Chancellor of the UK, is that the net financial deficit of the UK public sector is forecast to fall sharply and to trend to c2-3% of GDP throughout their forecast period. The bad news for UK households is that their net financial position is forecast to fall from its recent (and typical) surplus to sustained deficits of between 0.1% and 0.4% GDP. In short, the UK is set to become a nation of non-savers with households also spending more of their income on servicing their debt.

To return to the first lesson of 2022, the lack of appropriate health warnings and the implied structural shift in risk away from the public sector to the private sector here reflects either flaws in macro thinking and policy making and/or the heavy hand of reverse engineering. Neither are good news.

Please note that the summary comments and charts above and below are abstracts from more detailed analysis that is available separately.

“Clues from consumer credit II”

An update from the US

The key chart

Trends in US monthly consumer credit flows (Source: FRED; CMMP)

The key message

US consumer credit demand remains strong in absolute and relative terms but the growth momentum is slowing. A key signal to watch in 4Q22 and beyond…

The US has seen 25 consecutive months of positive monthly consumer credit flows since August 2020. The latest data FED data point for September 2022 (published yesterday, 7 November 2022), showed a monthly flow of $26bn (3m MVA). This was 1.8x the average pre-COVID flow of $14.8bn. Comparable multiples for the euro area and UK were 0.6x and 1.0x average pre-COVID flows respectively, highlighting one reason for the relative strength of the US recovery.

In my previous post (before yesterday’s data release), I highlighted that US monthly flows had been more than double their pre-COVID average since March 2022 and suggested that, “the risks to the US growth outlook include the sustainability of current consumer credit demand.”

September broke this trend and while it is too early to draw definitive conclusions it is important to note the slowing growth momentum since April 2022 when monthly flows peaked at $37bn (3m MVA), 2.5x the pre-COVID average (see key chart above).

A key signal for 4Q22 and beyond…

Please note that these summary comments and the chart above are abstracts from more detailed analysis that is available separately.

“Clues from consumer credit”

What are US, EA and UK consumer credit flows telling us?

The key chart

Monthly CC flows as a multiple of pre-COVID averages (Source: FRED; ECB; BoE, CMMP)

The key message

Monthly consumer credit flows tell us a great deal about the relative strength of the US, euro area (EA), and UK economies and the risks associated with future growth.

The immediate response of US, EA and UK households to the pandemic was a consistent one – they all repaid consumer credit (i.e. negative monthly flows). The subsequent responses have been anything but consistent, however.

The US has seen 24 consecutive months of positive monthly consumer credit flows since August 2020. More significantly, these flows have been more than double their pre-COVID average since March 2022. This suggests that the risks to the US growth outlook include the sustainability of current consumer credit demand in the face of rising borrowing costs.

The EA has experienced more volatile monthly flows but the key message here is that monthly flows have yet to recover to their pre-COVID average. In contrast to the US, the risks to EA economic growth lie more in the lack of demand for consumer credit and on-going household uncertainty.

After two periods of consecutive negative monthly flows (March 2020-June 2020 and September 2020-February 2021), the UK has experienced 19 consecutive months of positive consumer credit flows. While the strength of the recovery here has been less than in the US, UK monthly flows have exceeded their pre-COVID levels since April 2022. The less-than-average monthly flow seen in September 2022, however, is a reminder that the risks to the UK economic outlook lie in demand for consumer credit stalling and household uncertainty returning.

Clues from consumer credit

Monthly consumer credit flows tell us a great deal about the relative strength of the US, EA, and UK economies and the risks associated with future growth.

The US

Trends in US monthly consumer credit flows (Source: FRED; CMMP)

In the US, pre-COVID monthly flows averaged $14.9bn. In the early stage of the pandemic, US households repaid consumer credit for three consecutive months between March and May 2020. Monthly flows turned positive in July 2020 before turning negative again in August 2020.

Since then, there have been 24 consecutive positive monthly flows (see chart above). The latest data point for August 2022, indicates that the 3m MVA of these flows was $32.7bn, 2.2x the average pre-COVID flow.

Monthly flows have been more than double the pre-COVID average since March 2022 suggesting that the risks to the US growth outlook lie in the sustainability of consumer credit in the face of rising borrowing.

The euro area

Trends in EA monthly consumer credit flows (Source: ECB; CMMP)

In the EA, pre-COVID monthly flows averaged €3.4bn. In the early stage of the pandemic, EA households also repaid consumer credit for three consecutive months between March and May 2020.

Monthly flows turned positive in April 2022 but the subsequent trend has been more volatile than that in the US (see chart above). The latest data point for September 2022 showed a monthly flow of €4.8bn, which was 1.4x the pre-COVID average. The 3m MVA of monthly flows, however, was €2.2bn, only 0.6x the pre-COVID average.

The 3m MVA of monthly flows has yet to recover to pre-pandemic levels suggesting that the risks to EA economic growth lie more in the lack of demand for consumer credit and on-going household uncertainty.

The UK

Trends in UK monthly consumer credit flows (Source: BoE; CMMP)

In the UK, pre-COVID monthly flows average £1.2bn. In the early stage of the pandemic, UK households repaid consumer credit for four consecutive months between March and June 2022 and then again for six consecutive months between September 2020 and February 2021.

Since then, there have been 19 consecutive months of positive monthly flows (see chart above). These flows (on a 3m MVA basis) have exceeded pre-COVID flows since April 2022.

The latest data point for September 2022, shows a monthly flow of £0.7bn (0.6x pre-COVID flows) and a 3m MVA of £1.2bn (slightly below pre-COVID flows). A reminder that the risks to the UK economic outlook lie in demand for consumer credit stalling and household uncertainty returning.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“Challenging flawed narratives”

Four challenges to the “over-indebted US economy” narrative

The key chart

Share of outstanding non-financial debt by sector (Source: FED, CMMP)

The key message

The latest “Financial Accounts of the United States” published by The Federal Reserve at the end of last week challenges the popular, but flawed, narrative of an “over-indebted US economy”.

This narrative typically focuses on the outstanding stock of US nonfinancial debt, which hit another new high of $67.6 trillion at the end of 2Q22. Mistakenly, however, it ignores:

  • The significant shift away from private to public sector debt. The structure of US debt is now the mirror image of its pre-GFC structure following the shift away from relatively high-risk household (HH) debt towards lower-risk government debt (see key chart above)
  • The on-going, passive deleveraging of the HH sector. The HH debt ratio has fallen from its peak of 99% GDP at the end of 1Q08 to 75% at the end of 2Q22, very slightly above its post-GFC low
  • The relatively low levels of business (NFC) and HH indebtedness in a global context. The US is one of only three, BIS-reporting advanced economies with both NFC and HH debt ratios below the BIS threshold limits (above which debt becomes a constraint on future growth)
  • Key distinctions between public and private sector debt and their implications. Government debt represents financial wealth for the private sector, hence its position on the asset side of the private sector’s balance sheet. Furthermore, governments do not face the same constraints as the private sector. As a currency issuer, the US government cannot become insolvent in its own currency since it can always make payments as they come due in its own currency.

CMMP analysis believes that it is more accurate to view public sector debt as money in circulation rather than as debt in its more widely-held sense. In this context, “the idea of having to pay back money already in circulation [another feature of the flawed narrative] makes little sense.” (Alfonso, 2020. “Does the National Debt Matter?”)

Challenging flawed narratives

Trend in outstanding stock of US non-financial debt in $ trillions (Source: FED; CMMP)

According to the latest financial accounts, the outstanding stock of US nonfinancial debt reached $67.6 trillion at the end of June 2022 (see chart above).

Federal debt of $26.3 trillion accounted for 39% of total debt, followed by NFC debt of $19.5 trillion (29% total), HH debt of $18.6 trillion (27% total) and state and local debt of $3.3 trillion (5% total). The total debt ratio fell to 272% GDP, down from 307% GDP in 2Q20 at the height of the COVID-19 pandemic.

Share of outstanding non-financial debt by sector (Source: FED, CMMP)

The structure of US debt is now the mirror image of the structure that existed before the global financial crisis (GFC). At the end of 2Q07, HH debt accounted for 43% of outstanding nonfinancial debt, followed by NFC debt 30% and public sector debt (federal, state and local) 27%. Today (at the end of 2Q22), public sector debt accounts for 44% of outstanding debt, followed by NFC debt 29% and HH debt 27%. This represents a very significant structural shift away from relatively high-risk HH debt towards lower-risk government debt in the post-GFC period (see chart above).

Trends in HH debt ($ tr) and the HH debt ratio (% GDP) (Source: FED; CMMP)

The HH debt ratio has fallen from a peak of 99% GDP at the end of 1Q08 to 75% at the end of 2Q22 (see chart above). The peak level was 14ppt above the threshold level of 85% GDP above which debt is believed to be a constraint on future growth. The current level is slightly above its post-GFC low of 74% at the end of 4Q19.

The post-GFC period has been one of passive HH deleveraging.

Trends in HH and NFC debt ratios (Source: FED; CMMP)

The US is one of only three BIS-reporting advanced economies that has both HH and NFC debt below the maximum BIS threshold limits (along with Germany and Italy). The NFC debt ratio currently stands at 78% GDP, down from a recent high of 91% GDP at the end of 2Q20. For reference, the BIS maximum threshold limits for HH and NFC debt are 85% GDP and 90% GDP respectively (see chart above).

As shown in the chart below, the US private sector debt ratio of 153% GDP is now only slightly above the 145%-150% GDP range that characterised much of the past decade up until the COVID pandemic.

Trends in private sector debt ratio (% GDP) (Source: FED; CMMP)

Important distinctions exist between private sector and public sector debt, including:

  • While private sector debt is debt sitting on the liability side of the private sector’s balance sheet, government debt represents financial wealth for the private sector and sits on the asset side of the private sector’s balance sheet
  • As currency users, HHs and NFCs face obvious constraints on their levels of debt. “Taking on too much debt can, and does, lead to bankruptcy, foreclosure, and even incarceration” (Kelton, 2020)
  • In contrast, as a currency issuer, the US government cannot become insolvent in its own currency since it can always make payments as they come due in its own currency

CMMP analysis believes that it is more accurate to view public sector debt as money in circulation rather than as debt in its more widely-held sense. In this context, “the idea of having to pay back money already in circulation [another feature of the flawed narrative] makes little sense” (Alfonso, 2020. “Does the National Debt Matter?”).

Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.