🔔 Correcting Mistakes

January 11, 2022 • Estimated Reading Time: 7 minutes

Today's Opening Belle is brought to you by Utrust

utrust

I made a mistake yesterday. A really basic one.

How did it happen? I was consumed by the narrative, rushed it and didn't double check the numbers. Simple.

First up, let's correct the mistake. I said "US consumer debt hit record highs in November".

That statement was technically accurate (total consumer credit has been hitting record highs all year) 👇

But nobody cares about technical accuracy when it was entirely the wrong measure to focus on. By rushing to publish, I conflated the total credit 👆 with the revolving credit measure 👇

It's a very important distinction.

  • Revolving credit = a repeatedly accessible source that you can borrow or pay down whenever you like e.g. credit cards, credit lines, overdrafts etc.

  • Non-revolving credit = a lump sum up front, repayable in monthly instalments over a fixed term = personal loans, car finance etc.  

  • Total credit = those two added together, duh

Putting it into context

Revolving credit has a clear and obvious relationship with regular spending & consumption so that's where the focus needs to be.

Let's zoom out and take a look at consumer credit growth over the previous cycle. 2011 is ground zero, as credit growth was still contracting (in the aftermath of the GFC) until then. 👇

Or if you prefer the raw numbers...

Putting a story to the data, consumers were slow to take on debt initially. As the economy picked up from 2013, consumers started taking on credit and spending.

In 2016 & 2017 they took on even more before things calmed down a bit in 2018/2019.

Then in Covid 2020, that debt was paid down drastically before in 2021 they took on debt again at a serious pace. Unless consumers suddenly decided to pay that down in December, we're going to see a record year.

It's worth zooming back in to see just how extraordinary this past year has been.

Since May 2021, the average monthly increase in revolving credit is $10.3bn. 👇

June & December were the two notable outliers in credit growth. For context, growth of $37.36bn across those two months alone, which is more than any post GFC years except 2017 & 2018.

The bounceback effect or a sign of things to come?

If you take the pre-Covid total of $1,092bn as the high water mark, then consumer credit growth has another $54.6bn of headroom.  

Beyond that, who knows how much consumers will be happy to add?

And if financial conditions begin to tighten, perhaps lenders won't be so keen to extend limits...

Onto the fiscal cliff...

According to the latest household pulse survey, money is getting tighter.

Child tax credits were a big income booster for the second half of 2021. Generous for 2021 but no more for 2022...

All working families will get the full credit if they make up to $150,000 for a couple or $112,500 for a family with a single parent (also called Head of Household).

The American Rescue Plan increased the Child Tax Credit from $2,000 per child to $3,000 per child for children over the age of six and from $2,000 to $3,600 for children under the age of six, and raised the age limit from 16 to 17.

According to the December Census Survey of child tax credit recipients, most of the credits were spent...

📌  39% spent the money, most likely on necessities

📌  38% said they used the money to pay down debt 

📌  26% said they saved it

Obviously, it's only a survey so big doses of salt required!

Summing up, I'd love to believe that the consumer's really in great shape but I'm just not sure that's really the case, nor if it will even be the main story for markets this quarter with the Fed set to take centre stage.

ICYMI, here's yesterday's article 👇

Subscribe to our YouTube Channel and stay up to date with all of our videos as they're posted. We'll keep expanding and adding more formats as we go!

Don't know what financial news stories are important and what is complete bullsh*t? Hop onto our filtered news channel.

It's completely free 👇👇👇

And if you really want to get to grips with how global markets and economics work, with trade ideas to give you actionable context, then come and join us as a premium member where you're likely going to get a nice Market IQ boost. 👇

SPECIAL OFFER: So we wanna get more people with us long term.

The simple fact is that providing a monthly subscription means too many who want instant gratification join Macrodesiac. We want you to learn FOREVER for pretty damn cheap... £299 FOREVER, instead of £399. Click here to get on for LIFE now

Check out our reviews on TrustPilot 👇👇👇