Is Credit Addiction Back?

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US Consumers: Is Credit Addiction Back? The onset of summer tends to bring a lull in excitement in financial markets. The media is consequently forced to exaggerate the importance of economic releases over this seemingly mundane period. This year has proven to be no exception. The Financial Times recently reported that US consumer credit growth had surged by $18bn in the three months to June, thereby provoking fears that banks were being reckless and consumers were taking too much debt in a slow economy. These fears constitute a major departure from the worries that prevailed during the financial crisis, when many commentators were forecasting years of household deleveraging. Balance sheet adjustment in the sector would, therefore, act as…show more content…
Non-revolving consumer credit growth slowed significantly in June, while the expansion in the revolving category has continued its deceleration since the beginning of the year. The slower growth in non-revolving credit in June would be consistent with the rolling over, albeit at a high level, of auto and light truck sales in recent months. There was, however, a sharp rebound in sales in July to its highest level this year, implying that June’s sluggishness in the non-revolving credit could be short-lived. US Households Are Not Homogenous The Financial Times article seemed to imply that all segments of the US household sector have been on an irresponsible borrowing binge which could come back to haunt the economy. The reality is, as usual, much more complex: US households are not homogenous. Aggregate household net worth stood at $88 trillion in 2016 Q1, having recovered from a Great Recession nadir of $55 trillion, according to the Fed’s Flow of Funds publication. The bulk of the recovery has been driven by a $7 trillion rise in the equity value of owner-occupied real estate and a $9 trillion increase in the value of direct equity holdings. Meanwhile, indirect holdings of financial assets via pension reserves and insurance policies have increased by $17 trillion from their 2008 lows. The distribution of the aggregate rise in US household net worth has, however, been uneven. Firstly, the recovery in house
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