“Is the US consumer starting to crack?”

The key chart

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.

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.