Recent economic data reveals that consumer borrowing continues to rise, even as individuals grapple with inflationary pressures and the risk of delinquencies. This trend is detailed through two significant reports released by the Federal Reserve, highlighting the complex dynamics of consumer credit and inflation expectations.
Data from previous months have shown similar trends, with consumer credit consistently increasing. Earlier reports also indicated a gradual rise in both revolving and nonrevolving debt, mirroring the current findings. However, the latest data suggests a sharper rise in consumer borrowing, underscoring escalating financial strain and changing economic conditions.
The Federal Reserve Bank of New York’s latest reading on inflation expectations and the Federal Reserve’s Consumer Credit Outstanding report provides a comprehensive look at consumer behavior. The July data highlights a significant increase in various forms of debt, with revolving debt, including credit cards, surging at an annualized rate of 9.4%. This contrasts with a slight paydown observed in June, indicating a shift in consumer borrowing patterns.
Inflation and Spending
Overall revolving debt reached $1.359 trillion, a stark increase from $1 trillion in 2019, representing a 24.8% rise. Nonrevolving debt, such as auto and school loans, also grew at an annualized rate of 4.8%, outpacing the modest growth of previous months. The actual $25 billion increase in credit significantly surpassed the expected $12 billion, highlighting unexpected borrowing behavior.
The Consumer Expectations survey shows that inflation is perceived as a persistent issue. Survey respondents indicated stable short-term and long-term inflation expectations of 3% and 2.8%, respectively. Notably, the three-year inflation outlook rose to 2.5% from 2.3% in the previous month. Expectations for gas and rent prices also increased, while food price growth is expected to slow down.
Job Market Concerns
Consumer sentiment towards the job market appears cautious, with the probability of higher unemployment a year from now increasing to 37.7%. Wage growth is anticipated to trail behind year-ahead inflation, with household income expected to grow by 2.9%. The likelihood of missing a minimum debt payment within the next three months rose to 13.6%, the highest since the pandemic. A significant portion of the population, 43%, revolves their debt, with higher percentages among those living paycheck to paycheck.
The report indicates that inflation expectations are based on data from August, while the aggregate credit data is from July. This discrepancy suggests that consumers are reassessing their financial burdens as they prepare for future economic challenges. Median household spending growth expectations also increased slightly, hinting at continued reliance on credit.
As consumer spending outpaces wage growth and inflation, credit becomes the primary means to bridge the gap. The upcoming release of core inflation and consumer price data for August will provide further insights into the sustainability of this reliance on credit. These figures will help determine if the current borrowing trends are manageable or if they will lead to more significant financial difficulties.
