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IMA Executive News & Views Blog

America is Facing a $13 Trillion Consumer Debt Hangover

by Matt Scully

 

After bingeing on credit for a half decade, U.S. consumers may finally be feeling the hangover.

Americans faced with lackluster income growth have been financing more of their spending with debt instead. There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes. Household borrowings have surged to a record $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters. And with economic optimism having lifted borrowing rates since the election and the Federal Reserve expected to hike further, it’s getting more expensive for borrowers to refinance.

Some companies are growing worried about their customers. Public Storage said in April that more of its self-storage customers now seem to be under stress. Credit card lenders including Synchrony Financial and Capital One Financial Corp. are setting aside more money to cover bad loans. Consumer product makers including Nestle SA posted slower sales growth last quarter, particularly in the U.S.

Companies may have reason to be concerned. Consumer spending notched its weakest gain in the first quarter since the end of 2009, a problem in an economy where consumers account for 70 percent of spending, though analysts expect the dip to be transitory. And debt delinquencies are rising even as the job market shows signs of strength.

“There are pockets of consumers that are going to be sorely tested,” said Christopher Low, chief economist at FTN Financial. “We’ve conditioned American consumers to use debt to close the gap between their wages and their spending. When the Fed hikes, riskier borrowers are going to get pinched first.”

Since the 2008 financial crisis, the Fed has kept rates low to encourage companies and consumers to borrow more and spur economic growth. Much of the gains in household debt since 2012 have come from student loans, auto debt and credit cards. Over that time, wage growth has averaged around 2.2 percent a year, and the pace has been slowing for much of this year. Even if economists forecast that income growth will accelerate, those pickups have remained elusive.

 

Source: Bloomberg

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