Dan Alpert's Two Cents

WARNING: Stagnant Wages can Support Only so Much Consumer Debt – we appear to have hit the ceiling again

Since my last update on U.S. Retail Sales and Consumer Credit in June, we have seen a continued slump in retail sales data (August sales growth was essentially zero) and a skyrocketing rate of consumer credit growth, which returned to levels last seen before the Great Recession.

As you may recall, I have been tracking growth rates in consumer credit and retail sales for some time now, and my methodology and conclusions are set forth in a report on the unsustainability of sales in an environment beset by stubbornly high underemployment and real (now looking like it will be nominal) wage deflation. My original report on the subject can be found here.

This time it seems clear that we have hit the ceiling on consumer credit again. For the first time since the recession, we experienced a sustained period of consumer credit growth (mostly student loans and autos, as well as plastic) rather than a continuation of the pattern of de-leveraging that we saw during – and immediately after – the recession.

The acceleration of borrowing had an inflection point that corresponds nicely with the announcement of QE2 and consumer credit growth actually became net positive almost exactly upon the commencement of Fed buying. Retail sales growth shot up too and remained up into the second quarter. Then matters begin to get really dicey – consumer credit continued to grow but retail sales growth began a seemingly inexorable decline and we now expect it to turn negative.

The problem is, you can’t service more and more debt with stagnant/declining aggregate wages and continued high underemployment.

The Confidence Fairy may help pry the plastic out of your wallet, but she’s not much help when the bill comes!

The data illustrated by the graph below sets off all sorts of warning signals and undoubtedly is playing a not-insignificant role in the apparent return to recessionary or near-recessionary conditions.

Comments are closed.

Most Read | Featured | Popular

Blogger Spotlight

Håvard Halland Håvard Halland

PHåvard Halland is a natural resource economist at the World Bank, where he leads research and policy agendas in the fields of resource-backed infrastructure finance, sovereign wealth fund policy, extractive industries revenue management, and public financial management for the extractive industries sector. Prior to joining the World Bank, he was a delegate and program manager for the International Committee of the Red Cross (ICRC) in the Democratic Republic of the Congo and Colombia. He earned a PhD in economics from the University of Cambridge.