U.S. consumer borrowing hit record highs

American consumers are more indebted than ever. The recently released Federal Reserve Consumer Credit Report-G.19 shows that outstanding consumer credit in the United States has reached historic levels; outstanding consumer credit now stands at 4,700 billion dollars. In August, consumer credit grew at a seasonally adjusted annual rate of 8.3%. The previous rise in July was 6.%.

These current levels of consumer debt show that the Federal Reserve’s rate hike has not slowed consumer borrowing. While consumer credit declined in the years immediately following the 2007-2009 financial crisis, from the second quarter of 2011 through the second quarter of this year, consumer credit grew by 90%.

In August, non-revolving credit, which is largely made up of auto, student and personal loans, grew at an annual rate of 5.1%. This level is roughly unchanged from July.

Revolving credit, however, grew significantly at an annual rate of 18.1%; revolving credit includes credit cards, home equity lines of credit (HELOC), and personal and small business loans. While late payments and defaults appear to be under control so far, I’m concerned that with rising inflation, revolving credit will be a significant issue for American consumers as their cost borrowing increases. This problem will be compounded if unemployment rates begin to rise.

The banks will release their results next week, October 14. Banks are expected to report lower profits due to market volatility and a slowdown in investment banking operations. In earnings releases, what is important to monitor is the quality of assets in banks’ balance sheets. Take a look to see if non-performing loans (NPLs) are increasing and the calculated level for loan loss reserves. This data will allow the market to know whether such a high level of consumer debt should worry us.

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