A new report from WalletHub, the personal-finance website, could signal the U.S. economy is in late-cycle, as the stressed-out, tapped-out American consumer just rejected consumerism and has overwhelmingly decided to repair its overextended balance sheet instead.
While President Trump pedals the notion that the economy is the “greatest economy in HISTORY,” WalletHub noticed a considerable amount of Americans repaid $40.3 billion in credit card debt during the first quarter of 2018 — the second-largest quarterly payoff ever (via data from the U.S. Census Bureau, Federal Reserve and credit agency TransUnion).
Q1 2018 Credit Card Debt Paydown by City
Top 18 Largest Paydown Cities
However, WalletHub noted that Americans started the fiscal year by “owing more than $1 trillion in credit card debt for the first time ever, after adding a post-Great Recession record $91.6 billion to our tab in 2017.”
With credit card spending went through the roof, the consumer hit a decade low on their personal savings rate of 3 percent in the first quarter. In other words, the consumer is tapping into credit cards and savings to support an unsustainable debt-fueled lifestyle of which propaganda from the government and or the Federal Reserve have induced the stressed-out consumer to buy things they do not need.
“Only four times in the past three decades have we overspent so much in a year. And in each case, the charge-off rate – currently near historical lows – rose the following year. That’s true so far, as charge-offs jumped nearly 5% from Q4 2017 to Q1 2018,” said WalletHub.
Outstanding credit card debt is at the second-highest point since the end of 2008.
The $40.3 billion in credit card debt that we repaid in Q1 2018 is 23% above the post-Great Recession average. It is also the second highest pay-down in history - second only to Q4 2008's collapse.
We ended 2017 with $91.6 billion in new credit card debt, most for a year since 2007 and 104% above the post-recession average.
Since the end of the Great Recession, consumer performance has regressed on a year-over-year basis in two out of every three quarters.
At 3.80% for Q1 2018, the charge-off rate is up nearly 6% year over year and at the highest point since mid-2012.
“Make America Great Again” means the consumer will spend money they do not have and buy things they do not need.
Teddy Vallee, a consumer analyst tweets, “Multiple indications of wage growth acceleration; however it’s being used to pay down outstanding debt rather than drive incremental consumption (see recent revolving credit numbers). Given leveraged consumer BS’s, next iteration in cycle is a rise in 30-day delinquency rates.”
Multiple indications of wage growth acceleration; however it's being used to pay down outstanding debt rather than drive incremental consumption (see recent revolving credit numbers). Given leveraged consumer BS's, next iteration in cycle is a rise in 30 day delinquency rates. pic.twitter.com/HtrbSCyQh6— Teddy Vallee (@TeddyVallee) June 13, 2018
Saving more by servicing consumer debt might make sense for the stressed-out, tapped-out American consumer in one of the longest Central Bank induced economic expansions ever; however, it could be more bad news for the service based economy when everyone decides to save all at once to service debt, since the trend could lower the level of consumption and set up the economy for the next recession.
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Consumers are being squeezed by a triple threat:
Higher interest rates, which the Federal Reserve will likely hike again tomorrow; and
Consumer prices, which are climbing at their fastest pace since 2011, even as wages remain stagnant.
And that squeeze is showing up as the first big crack in credit card balances as the perennially debt-fueled lifestyles (sparking all that optimistic consumption) is hitting a wall.
And as a reminder, the yawning gap between exuberant confidence and desperately low savings rates has not ended well in the past...(what happened to stocks in 2000 and 2007?)
And judging by the size of the drop in the charts above, we may just be about to find out this time is not different.