How much of U.S. consumer strength is based on borrowing?

Some naysayers believe the strong U.S. economy is somewhat of an illusion, propped up by borrowing. Mitch offers his insights.

Are U.S. Consumers Borrowing Their Way to Strong Spending? We often cite the U.S. consumer as the key engine driving economic growth, and for good reason—in Q1 2024, personal consumption expenditures (PCE) accounted for nearly 68% of GDP. In short, strong spending begets strong economic growth. This relationship is evident in the chart below, with PCE (red line) and GDP moving almost perfectly together.1 Consumer Spending is the Main Driver of GDP Growth Source: Federal Reserve Bank of St. Louis 2 I’ve written many times recently that U.S. consumers are being bolstered by a strong jobs market and rising wages, which have more than offset the impact of higher prices. But recent data from the New York Fed’s Quarter Report on Household Debt and Credit shows that consumers may also be pulling strength from another, less fundamentally sound source: borrowed money. According to the report, total household debt rose by $184 billion to reach a staggering $17.69 trillion by the end of Q1 2024. Critically, the New York Fed reported that almost 9% of credit card balances and 8% of auto loans (annualized) had transitioned into delinquency, with rising numbers across all age groups. Get Market Insights in Our Brand-New Stock Market Outlook Report! I’m inviting all Mitch on the Market readers to download our brand-new Stock Market Outlook Report.3 This report includes just-released commentary and insights into the market to help you make decisions based on data and fundamentals instead of fears and media hysteria. You’ll get insight on: Expert market strategy commentary Zacks sector picks Global market data Zacks S&P 500 earnings insights And more… If you have $500,000 or more to invest and want ideas on how to invest in a strong market, click on the link below to get your free report today! 3 Total Household Debt Has Risen Significantly Over the Past Couple of Years Source: New York Fed 4 Economic naysayers framed the New York Fed data as evidence that current economic strength is something of an illusion, with consumer spending numbers being propped up by households falling into financial distress. There is some truth to this. Taken at face value, the New York Fed report shows clear signs of stress forming on some U.S. household balance sheets. Indeed, for all debt outside of student loans (which has benefited from forgiveness programs), delinquency has been steadily rising since Q4 2021 after the historic lows reached during the COVID-19 pandemic. Credit card delinquencies have risen past pre-pandemic levels. Before sounding alarm bells, however, some context is needed. Just because household finances in aggregate have gotten worse over the past several quarters does not mean households are in bad shape overall. For one, delinquencies over 90 days remain at historically low levels even with the recent increase. As seen in the chart below, delinquencies are nowhere near levels experienced during the 2008 Global Financial Crisis and are lower than they were from 2014 to 2020—which are generally considered strong economic growth years. Transition Into Serious Deliquency (90+) by Age Taking on more debt is certainly not helping U.S. household finances, but I also don't think it’s fair to say the situation is turning dire. The clearest evidence comes from looking at household debt service payments as a percent of disposable personal income. In other words, the question to ask is: how much is it costing Americans to service their debt? The answer is not much, at least when comparing current levels to the past 50 years. Americans are taking on more debt, but their incomes have also been rising such that the amount of income that goes to paying off debt each month is still at historically low levels, as seen in the chart below. Household Debt Service Payments as a % of Disposable Personal Income Source: Federal Reserve Bank of St. Louis 5 Additional signs that executives are feeling more confident about the macroeconomic outlook include higher capital expenditures (CapEx) and more stock buybacks. According to Business Roundtable’s CEO survey, 40% of CEOs expected to increase investments in the next six months, the highest since Q4 2022 and up 32% from Q4 2023. As seen in the chart below, business investment has been strong in recent periods. Bottom Line for Investors U.S. household debt has increased recently, but that’s also what we’d generally expect to see in an economic expansion. Wages are up, borrowing is up, and spending is up. U.S. consumers have loathed inflationary pressures, but they’re also feeling pretty empowered at the moment, in my view. The strong labor market deserves the credit. Rising delinquencies will be important to watch going forward, however, particularly if we begin to see cracks in the jobs market. But I do not think that moment has arrived, and for now, I see U.S. households in strong shape overall. To give you a deeper look into the stock market and what you can expect in the second half of the year, I’ve arranged for our readers to download our brand-new June 2024 Stock Market Outlook 6. This report includes just released commentary and insights into the market to help you make decisions based on data and fundamentals instead of fears and media hysteria. 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