Debt Relief Industry Forecasts and Trends

Consumers Loading Up on Credit in May But Watch Out

Written by Steve Rhode

Yesterday I published Revolving Debt Increases in May. Is This a Good Sign? and then a reader sent me a tipster (send in your tips here) message and pointed out an article The American Consumer May Now Be Maxed Out.

The article draws the conclusion that:

“We contend, in our original report on this series, “Retail Sales as Echoes of a Pre-Crisis Habit” (November 18, 2010), that pre-crisis bubble growth in the economy was substantially enabled by (and is an unsustainable reflection of) an unprecedented growth in credit of all types. After years of profligacy, households began to have difficulty carrying their debt loads beginning in Q1 2007 and, by Q2 2008, the debt bubble burst and the crisis ensued.

Since Q4 2009, we have experienced a series of micro-cycles as consumer reached again for plastic (and, as auto sales recovered, installment loans), leading to a fairly robust expansion in retail activity as our 3-month trailing growth rate finally turned positive about 8 months ago. Consumer behavior then began to echo pre-2007 habits, albeit with substantial constraints on their ability to re-leverage.

But, again, we have our doubts that activity in the real economy is sufficient to sustain this pattern, as we noted in November: Expansion and contraction of retail sales in the post-panic U.S. economy has been predominantly the result of fluctuations in the use and repayment of consumer credit facilities, not the normal recovery patterns expected following a garden-variety recession. These activities principally represent the overall recent patterns of consumer saving, punctuated by periodic dis-saving as credit facilities free up, are employed again, and then must be paid down anew.”

In that original report the statement is made, “The consumer may be seen from time-to-time as being
“back” – but at best she is coming and going until other economic fundamentals offer her a sustainable deal.” That is a brilliant observation.

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Even the increased borrowing levels in May look different when you look at them compared to retail spending. So if consumer debt levels are jumping up and accelerating but retail sales are flat or falling that seems to indicate that the use of credit is more about making ends meet than optimism about the future.

Look at my red arrow below. See where the purple retail spending line is in relation to the green outstanding consumer credit line in May?

One other little tidbit of information that supports this view is the continued decline of the consumer confidence index.

The Conference Board Consumer Confidence Index®, which had declined in May, decreased again in June. The Index now stands at 58.5 (1985=100), down from 61.7 in May. The Present Situation Index decreased to 37.6 from 39.3. The Expectations Index declined to 72.4 from 76.7 last month.

That certainly seems to indicate that any increase in consumer credit consumption at this point is not about an enthusiasm for the future which will lead to aggressive consumer credit consumption that will lead to more business for debt relief. It is however probably good news for bankruptcy attorneys.


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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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