Don't Rely on U.S. Consumers to Power Global Growth

American households have maintained spending by taking on debts that could prove unsustainable.

U.S. consumers account for 18 percent of global gross domestic product, and it’s tempting to rely on them to continue carrying the aging recovery to support world growth. The data and growing lender anxiety, though, suggest investors should prepare for what is increasingly looking like an inevitable slowdown in economic growth next year.

Although American households managed to maintain their spending levels in the face of dwindling prospects for future economic expansion, they have done so by taking on incremental debts, which could soon prove unsustainable.

Headed into the 1960s, consumer credit as a percentage of disposable income was 14 percent. As baby boomers came of age and started settling down in suburbia to build families under their own roofs, this figure rose to 18 percent where it largely remained until the early 1990s.

The go-go run of the 1990s, though, was the first major break from history; consumer credit as a percentage of household discretionary spending rose to 24 percent by the turn of the century and remained there until the recession of 2007-2008. And while there was a movement toward deleveraging, it was short-lived. Today the ratio sits at a high of 26 percent.

The upshot is that when consumer credit is combined with government transfer payments the total amounts to about 43 percent of all consumer spending. Put differently, almost a third of U.S. growth relies on increasing debt in one form or another.

“Through the use of credit, personal and government, U.S. households have pulled forward future consumption,” said Michael Liebowitz, a principal at 720 Global/Real Investment Advice, an economic and investment consulting firm. “The weight of those outstanding obligations serves as a wet blanket on current and future economic growth.”

Economists have long emphasized the historically low debt-service costs households must shoulder as proof that the rebuild in debt levels was not problematic. It was telling that fresh data revealed Americans ploughed more of their income to paying debts last year, the first increase in seven years. Moody’s Investors Service warned the troubling finding would lead to further increases in default rates.

JPMorgan Chase and Citigroup validated the data in their most recent earnings reports in which they boosted their reserves for losses on consumer loans by the most in more than four years. Credit card debt, which clocked a brisk 7 percent growth rate in August, was specifically cited. Citigroup added that the increase was coming faster than anticipated.

The stresses, though, have been growing for almost two years when increases in credit card borrowing began to outpace that of incomes. The "something-had-to-give" moment appears to be arriving.

After a sustained decline following the flood of foreclosures and tightened lending standards for mortgage and credit cards, U.S. household credit card debt-to-income has come off its 2015 lows and continues to rise.

It’s notable that these trends are deepening against a backdrop of record high stock and bond prices. A true reset in these markets will further weigh on consumption as higher income households cut back on discretionary spending.

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