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US household consumption: beware of credit conditions!

Investors are still perplexed about the US growth outlook, with the weakening observed in Q1 (0.7% qoq annualised). Indeed, the gap has widened between business surveys,  which are good, and real business numbers, which are mixed. Household consumption, the US economy's main engine, has been disappointing amid flat private investment. However, this expansion cycle has also been characterized by very attractive financing conditions, a result of the Fed's highly accommodating monetary policy.

Where are we in the US credit cycle?

  • Corporate indebtedness is at an all-time high. The IMF itself has issued a warning about the difficulties to perform debt servicing for a substantial proportion of US businesses, paradoxically in a very low interest rate environment.
  • Conversely, consumer spending has projected a rather reassuring image overall.The current environment is totally different from the one seen in 2008: outstanding mortgage debt remains contained and concentrated on the least-risky households. However, it is best not to be overly optimistic: the risks associated with consumer loans (student, auto, and credit card) have risen sharply.
  1. The volume of student loans virtually doubled between 2008 and 2016. 
  2. Auto debt is 40% higher than the peak of 2008, and a substantial share of the outstanding loans is exposed to the subprime risk.
  3. Growth in credit card debt has accelerated recently. At this rate, the peak achieved in 2008 will be surpassed in less than one year.

The credit conditions survey conducted by the Fed with the top US banks ("Senior Loan Officer Opinion Survey") confirms a less-optimistic scenario. Published on 8 May, it shows that bank loan demand among consumers and businesses is down. This decline in demand is especially marked for auto and "credit card" loans (remember that these two segments make up a little over half of non-real estate consumer debt). The Senior Loan Officer Opinion Surveyalso shows a distinct tightening of credit conditions for the auto loan segment over Q2, and mixed factors on the other bank loan segments. The worsening outlook on the auto segment should weigh down economic forecasts a bit. That is one of the reasons why the New York Fed is issuing relatively weak growth forecasts (just 1.75% for 2018, compared to 2.5% for the major players on the US Treasury bond market), explaining:”For 2018, we expect real GDP growth to be close to our estimate of potential growth as financial conditions continue to tighten”.

The United States' position in the credit cycle will make any noticeable acceleration of US growth in the coming years difficult:  the US auto sales slumped for the fourth month in a row and consumption growth remains supported by the growth in the credit card debt, which will probably fade in a two year horizon. 

 

 

 

 

2017.05-weekly - 1
AINOUZ Valentine , CFA, Credit Strategy
DRUT Bastien , Fixed Income and FX Strategy
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US household consumption: beware of credit conditions!
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