The State of the American Debt Slaves, Q1 2020
How are consumers positioned going into the crisis?
Most of the first quarter was still the Good Times, but in later February and early March it hit the fan, as markets were crashing. In mid-March lockdowns started to roll across the country, and the layoffs by the tens of millions commenced. So how were consumers positioned going into this crisis? Many of them, up to their eyeballs in debt.
Consumer debt – student loans, auto loans, and revolving credit such as credit cards and personal loans but excluding housing-related debts such as mortgages and HELOCs – jumped by $153 billion at the end of the first quarter, compared to Q1 a year earlier, or by 3.8%, to $4.15 trillion (not seasonally adjusted), according to Federal Reserve data:
In March, the problems already became apparent. On a seasonally adjusted basis (the above is not seasonally adjusted), consumer credit fell 0.3% in March from February, and except for December 2015, when a large statistical adjustment was made, this was the first month-to-month decline since the Great Recession.
OK, we know consumer credit is going to plunge. Balances of auto loans and credit loans will come down not because consumers are suddenly more prudent, but because they have lost their jobs and will default on their credit cards and auto loans. Those defaults were already happening going into the crisis, and they’re now accelerating. When lenders write those loans off, the consumer credit balances come down. Nothing to do with prudence of consumers but with losses at lenders.
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