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.