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According to The New York Federal Reserve, consumer debt is at record highs.
At the end of 2022, U.S. consumer debt across all categories totaled $16.9 trillion. That was an increase of $1.3 trillion from one year ago. What’s more alarming is that in 2019, the total U.S. consumer debt was $14.14 trillion.
So, while higher interest rates likely fueled some of the increase from 2021 to 2022, increasing consumer debt had occurred even before the Federal Reserve began its rate hikes.
What is concerning about the increasing consumer debt is what it says about the future of our economy. In 2017, the International Monetary Fund released a report that showed a correlation between rising consumer debt and the economy’s health. The IMF concluded that rising consumer debt was good for the economy in the short term.
For example, the more consumers take out auto loans, the more the automotive industry, from the auto parts manufacturers to the big auto manufacturers to even the auto dealers, will experience an increase in labor needs. This increase reduces unemployment, which increases overall economic activity and spurs the economy.
Consumer debt rises related to the housing industry have the same effect but on an even larger scale. It’s been reported that for every new home built in the U.S., 1.5 new jobs are created.
The IMF study clearly says that while consumer debt is increasing, there are economic benefits. But, in three to five years, those positive effects are reversed. The report states that growth is slower than it would have been if the debt had not increased, and more importantly, the odds of a financial crisis increased.
The IMF went into detail about how much consumer debt needs to grow in order to raise the likelihood of a financial crisis. Their calculations indicate that a five percent increase in the ratio of household debt to the gross domestic product over a three-year period forecasts a 1.25 percentage point decline in inflation-adjusted growth three years in the future.
If we look at nominal GDP from January 2019 to January 2023, it has gone up by almost 24.5%. Consumer debt during that same timeframe has gone up by 19.5%. That doesn’t sound bad since GDP is growing faster than consumer debt.
However…
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