Investor Essentials Daily

Choking on credit

April 22, 2024

While employment and wage growth appear strong, there are concerning signs in today’s economy. 

Consumers face high-interest rates on loans, including auto and credit card loans, leading to a significant financial burden. 

Unlike in the past, consumers can’t avoid debt, as non-mortgage interest payments now equal mortgage payments. 

With debt becoming increasingly unmanageable, there’s a looming risk of economic downturn, as consumers are running low on borrowing power, facing high-interest rates, and experiencing record-high levels of credit card debt and delinquencies. 

This situation may lead to consumers being unable to sustain their borrowing and spending habits, potentially causing a worse economic downturn than the Great Recession.

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Employment and wage growth are going strong… but everything isn’t fine in today’s economy.

Consumers are grappling with borrowing at elevated interest rates unseen in years. Over the past few quarters, both auto loans and credit card loans have soared to unprecedented levels.

For the first time since at least 1978, non-mortgage interest payments have equaled mortgage interest payments, presenting a significant financial burden on Americans.

In short, despite positive job market data, consumers as a whole are getting weaker. And unlike in years past, they have no way of hiding from debt…

Leading up to and after the Great Recession, non-mortgage interest payments were about half the size of mortgage interest payments…

In other words, the “consumer-debt problem” was a real estate problem, first and foremost.

Consumers were paying about $600 billion per year on mortgage interest right before the housing bubble burst. And they only paid around $300 billion on all other interest payments.

While that concentration helped lead to the housing market collapse, it also gave consumers a fairly easy path to clean up their balance sheets. Don’t take out a mortgage, and you’ll be fine.

Today’s consumers don’t have that luxury. Mortgage interest payments are fast approaching $600 billion again. And this time, non-mortgage payments are just as high.

That means consumers are paying interest on everything… their homes, their cars, even student loans. And they’re paying for more regular purchases on credit, too. Credit card debt is at its highest level ever.

Consumers are running low on borrowing power… and things are going to get ugly.

Debt is getting far too expensive for consumers to handle. The average credit card interest rate has jumped to 22%. And the number of borrowers who carry a balance on their credit card continues to increase.

Consumer debt ballooned 17% to a new high in 2023. Credit card delinquencies rose 4.6% in the same period.

Even during an event as catastrophic as the Great Recession, there was a pretty simple economic pressure release valve… stop buying homes with debt.   

That’s not necessarily an option today.

When everything from food to transportation is purchased on credit, it’s much harder for consumers to simply stop borrowing…

It won’t necessarily doom the economy overnight. But the economic vise is tightening.

Credit card balances have surged to unprecedented levels, signaling that consumer cash pools are running dry.

Many folks continue to borrow out of necessity. It’s the only way to handle the simultaneous pressures of persistent inflation and high-interest rates.

It may not be immediate, but this is a reason to think that eventually, consumers are going to have to stop borrowing and spending like they are today.

Consumers might end up in an even worse spot than during the Great Recession… and they could take the economy down with them.

Best regards,

Joel Litman & Rob SpiveyChief Investment Strategist &
Director of Research
at Valens Research

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