Debt Don’t Fail Us Now

The cracks are getting wider in the US economy.

Mortgage applications dropped 6.5% last week, the MBA said Wednesday. It was the fourth consecutive decline. The index fell to the lowest in more than two decades. Joel Kan, the MBA’s Associate Vice President of Economic and Industry Forecasting, reiterated familiar talking points. “Worsening affordability challenges have been particularly hard on prospective first-time buyers,” he said.

April’s housing market data was uniformly foreboding. I’d expect the same for May’s numbers, which will begin to trickle in next week, with starts and permits. Although incremental, Wednesday’s mortgage applications figures reinforced the notion that Americans are increasingly reluctant to engage as borrowing costs rise and home prices remain stuck at record highs.

It doesn’t help that families (I won’t call them “households,” because if they still count as “prospective” first-time buyers, they don’t have a house yet) are struggling with record high gas prices and increasingly onerous grocery bills.

It was notable that revolving credit posted yet another outsized gain in April, according to Fed data out this week. The $18 billion increase came hot on the heels of a $26 billion advance the prior month (figure below).

The figures aren’t adjusted for inflation. The optimists among you might say the US consumer is “resilient” despite rising costs. The pessimists will say Americans are running up debt to maintain lifestyles in the face of generationally high prices for everything from basic necessities to luxury items.

New York Fed data showed a record number of credit card accounts for the first quarter (figure below). Balances declined by $15 billion, in line with the seasonal, but were more than $70 billion higher than Q1 2021.

At the same time, mortgage originations dropped to a two-year low as refi demand fell sharply amid soaring rates. The decline in purchase originations was more modest, but as the NY Fed’s Andrew Haughwout pointed out, volumes were still below 2021’s Q1 levels, which means it wasn’t just a seasonal thing. Obviously, the average dollar amount of newly opened mortgages has risen with home prices.

There’s a vociferous debate around the viability of the “excess savings” narrative, which says Americans’ pandemic “buffers” will suffice to support consumption at least for another few quarters. The question is: In whose hands does that “extra” money reside?

If the majority of it is concentrated in the bank accounts and money market funds of the rich, it doesn’t much matter. They have the lowest marginal propensity to consume, and high credit scores. If they want to go shopping — for clothes, a home or anything in-between — they’re going to do it anyway, unless there’s a deep recession. The economy needs regular people to keep spending.

If regular people are more inclined to fund consumption with debt, it’s worth noting that Americans now have some $3.3 trillion in headroom on their credit cards. That’s a record (figure below).

Again, there are two ways to look at the situation. One way is to suggest that between still swollen savings and money market fund balances (whoever owns them) and trillions in available revolving credit, spendthrift Americans can keep spending.

A less generous interpretation would be to call this a recipe for disaster. Revolving credit is rising sharply alongside surging prices, there’s scope for variable rate debt to go considerably higher and the Fed is aggressively raising rates.

Total household debt is now $1.7 trillion above pre-pandemic levels. Credit card balances remain below the highs hit in the fourth quarter of 2019.

You can draw your own conclusions. Oh, and the Atlanta Fed GDPNow tracker sits at just 0.9% for Q2. With Q1 already on the books as a negative print, the world’s largest economy appears perilously close to that recession most analysts still claim is at least a year away. Thankfully, we can just borrow-spend our way around it, like we do everything else.