C O N S U M E R S E N T I M E N T / D E B T
Never underestimate the importance of people spending money. That is why the general mood of consumers means so much. Some people made fun of President George W. Bush when he told everyone to just "go shopping" after the 9/11 terrorist attacks, but that may have been the single most important thing he could have said to Americans at that time. Recessions usually start when an event happens that causes people to stop spending money. Take the granddaddy of them all, the Great Depression. The Great Depression was triggered by the stock market crash of October 1929. In short, people freaked out and cash stopped flowing.
Before the Covid-19 crisis, this hadn't been an issue for America in quite a while. In fact, consumer spending had been driving growth in GDP like crazy. In September 2017, the Federal Reserve Bank of St. Louis reported that personal consumption expenditures (i.e. consumer spending)...
... has contributed 74.9 percent of overall economic growth during this cycle so far, a share exceeded in only two other cycles.
The combination of weak overall GDP growth and strong contributions by both residential investment and consumer spending mark the defining characteristic of the current business cycle: Household-related spending is driving the economy like never before. Fully five-sixths, or 83 percent, of total growth since the economy began to recover in 2009 has been fueled by household spending. Hence, the continuation of the current expansion may depend largely on the strength of U.S. households. Read the entire report here.
Two years later, consumer spending had only strengthened. In four major indexes that measure consumer confidence – the University of Michigan’s consumer sentiment survey, the Conference Board’s consumer confidence index, the Bloomberg Consumer Comfort Index, and the Organization for Economic Cooperation and Development’s consumer confidence index – U.S. consumer confidence remained high thanks to favorable job and income prospects.
But here's the problem: You live by consumer spending/confidence, you die by consumer spending/confidence. American consumers cannot carry the burden of keeping the national economy afloat forever. It's impossible. Especially when a worldwide pandemic hits.
Even before Covid-19, there were already warning signs. According to the Federal Reserve District's January 2019 Beige Book –a publication about current economic conditions across the 12 Federal Reserve Districts – "outlooks generally remained positive, but many Districts reported that contacts had become less optimistic in response to increased financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty." Read the entire report here. This continued in July's report: "The outlook generally was positive for the coming months, with expectations of continued modest growth, despite widespread concerns about the possible negative impact of trade-related uncertainty." Read the entire report here.
Meanwhile, cracks started to show in the economy itself. Take car payments, for example. In February 2019, the New York Fed reported this: "Although rising overall delinquency rates remain below 2010 peak levels, there were over 7 million Americans with auto loans that were 90 or more days delinquent at the end of 2018. That is more than a million more troubled borrowers than there had been at the end of 2010 when the overall delinquency rates were at their worst since auto loans are now more prevalent. The substantial and growing number of distressed borrowers suggests that not all Americans have benefitted from the strong labor market and warrants continued monitoring and analysis of this sector." Plus, it was reported in November 2019 that personal loans had increased 10 percent from the year prior, with an average balance of $16,259. Personal loan balances over $30,000 had increased 15 percent in the previous five years.
The bottom line is that, with or without a worldwide crisis, Americans are increasingly spending money they don't have. According to the Federal Reserve Bank of New York, the Center for Microeconomic Data's (CMD) Quarterly Report on Household Debt and Credit for the second quarter of 2022 revealed that
Total household debt rose $312 billion, or 2 percent, to reach $16.15 trillion. Mortgage balances — the largest component of household debt — climbed $207 billion and stood at $11.39 trillion as of June 30. Credit card balances saw their largest year-over-year percentage increase in more than twenty years, while aggregate limits on cards marked their largest increase in over ten years.
$16.15 TRILLION! YIKES!