Consumer Credit, Aside From Student Loans, Continues to Sink Like a Stone

Recent statistics released here in the U.S. shows consumer credit rising, which in turn should bode well for consumer spending.

Once again, when looking within the numbers, it is student debt that is increasing, while core consumer credit is actually falling.

From the fourth quarter of 2008 to the first quarter of 2012, credit-card debt has fallen 21.6%. In the same time period, student loans have leapt by 41.4% (Source: Wall Street Journal, May 31, 2012).

After the financial crisis hit, the average American consumer was saddled with too much debt. Naturally, the average American cut back on consumer spending to pay down this debt.


Since 2008, household debt has fallen 10%. A good start, but not enough to truly cut through the high debt levels the average American took on before the financial crisis.

What this implies is that, although household debt is falling, it needs to fall still more to a manageable level so that consumers don’t feel they are strangled by too much debt, allowing consumer spending to resume with GDP growth to follow.

High student debt is potentially dangerous and unhealthy for the economy. Young people feel obligated to go to school, because there are no quality jobs out there.

The problem is that, when they’ve graduated, there may not be any quality jobs waiting for them either, while they attempt to pay their student debt. This affects consumer spending, the housing market, and population growth. For example, they can’t spend with too much debt, and they will be more apt to rent a home than buy, as the student loan feels like a mortgage.

This could bring down the long-term potential rate of GDP growth of this country, which would reduce the standard of living in America. (See: Economic Growth in Second Half of 2012 to Deteriorate.)

In Europe, consumers are faced with the same issues, just to a worse degree. Unemployment is much higher in Europe, which is causing consumer spending to fall off more dramatically. Consumer credit in the eurozone is contracting more severely; shrinking GDP growth.

In Europe, a bigger problem is the banks that are not lending money to people, which further reduces consumer spending and continues to ensure that GDP growth contracts.

The problem in Europe is that the banks have reduced lending to levels not seen since the Lehman collapse of 2008!

Reduced lending and lack of credit growth in both the U.S. and Europe will cause consumer spending and GDP growth to drop.

Here’s yet another reason to tread carefully with this market, dear reader: consumer spending, which is 70% of GDP growth, is contracting. Profits for corporate America will obviously contract as consumer spending contracts.

Where the Market Stands; Where it’s Headed:

“The Dow and S&P posted their best day of 2012 as investors grew hopeful that more stimulus for the global economy is around the corner,” ran the text I received yesterday afternoon from a popular news organization.

Let’s stop for a minute and really think about this.

The stock market ran up yesterday, because investors are excited about the possibility that world central banks will print more money. Does that make any sense?

Historically, the stock market has moved higher, because interest rates have fallen (corporations have less interest expense on their books; investors see stocks as a good alternative to bonds or real estate) and/or because corporate profits (which lead to higher dividend payments for investors) have risen.

We are now dealing with the stock market rising, because there is a possibility that the Fed or European Central Bank (ECB) will print more money…really? It’s a very short-term, ridiculous concept.

I suppose we’ll just continue for years (with no structural improvement to the economy), while our national debt reaches 150% of our GDP, and then we are the next Spain? If I didn’t know any better, I’d guess this is where it’s all headed in the end.

What He Said:

“Over the past few weeks, I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy and the stock market. There’s no escaping the carnage headed our way, because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom that peaked in 2005, have yet to arrive.” Michael Lombardi in PROFIT CONFIDENTIAL, March 22, 2007. At the same time Michael wrote this, former Fed Chief Alan Greenspan was quoted as saying: “…the worst is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”