A little over a week ago, when looking at the latest consumer credit data from the Federal Reserve, we were shocked to learn that in March, credit card debt soared by a record $52.4 billion, the biggest monthly increase on record and more than double the expected change.
Summarizing our views on this historic surge in credit-fueled purchases, we said that "while this unprecedented rush to buy everything on credit at a time when there were no notable Hallmark holidays should not come as much of a surprise, after all we have repeatedly shown that for the middle class any "excess savings" are now gone, long gone...
... the fact is that most economists - such as those at Goldman Sachs - had previously anticipated that continued spending of savings by consumers (who they fail to realize are now tapped out) is what will keep the US economy levitating in 2022. Unfortunately, as today's consumer credit numbers clearly demonstrate, any savings that US middle class households may have stored away courtesy of stimmies, are long gone."
Hilariously, yesterday it was none other than the person who in late 2021 predicted - incorrectly - that "pent up savings" would provide a major boost to the US economy in Q1 and Q2 of 2022, much to our amusement and criticism (of which we dispensed generously here)...
... and who admitted that US consumers, drowning in inflation, are "already relying on leverage to some extent to fund their spending."
We are talking, of course, about Goldman chief economist Jan Hatzius, who no longer sees any "pent-up savings" offsetting either the fiscal or the hyperinflationary drag (unlike what he said in October) and instead speaking on Bloomberg TV, said that “borrowing is going to be a short-term driver of spending, and I think has been to some degree already." Did the explosive growth in credit card borrowing tip him off?
Sarcasm aside, Hatzius was at least was correct in saying that “consumer spending is going to be relatively slow. Income is going to be quite weak in 2022” which is also why the bank slashed its GDP forecast over the weekend and now see only a 1.25% gain in gross domestic product in the fourth quarter of 2022 compared with the same period of 2021.
Echoing verbatim what we have said since late 2021, Hatzius also said that not only is consumer credit on the rise, but there has been a pickup in mortgage-equity withdrawal where homeowners take out a loan against the appreciated equity in their property, and concluded that both dynamics are supporting spending. Well of course. The question is what happens when those credit cards are maxed out.
The Goldmanite's remarks contrast with the view of some (idiot) economists who see bloated stockpiles of savings, thanks especially to government transfers during the pandemic, as a major pillar of support for consumer demand. Newsflash: as we have said since the summer of 2021, those "excess savings" are gone... all gone. In other words, take the whole "consumer is strong" narrative and shove it.
Which is a problem since Goldman (for now) is sticking with its call that the Federal Reserve will raise its benchmark rate to a 3%-to-3.25% range. “The risk case is that they have to do more and that then also raises the risk of a hard landing,” Hatzius said. Meantime, consumers’ reliance on leverage “supports spending in the short term but ultimately is not going to be a sustainable source of big increases in spending,” Hatzius said. “So it builds in a slowdown, sort of down the road.”
You mean, precisely what Zero Hedge said in October in counter to the cheerful optimistic econotakes by... Jan Hatzius last October. Yes, why yes indeed.
And yes, for those wondering, Goldman did actually publish a note a few days ago (available to professional subs), explaining why the surge in consumer credit is quite concerning...
... concluding that "once credit levels have normalized and households can no longer grow credit at a higher than normal pace, we see potential for binding credit constraints to subtract up to 2% from the level of PCE."
In conclusion, Hatzius said that the timing of a downturn in housing will determine the turning point, he said. While that’s not yet evident in the data, it’s bound to come given the surge in mortgage rates.
The implications, as we correctly said two weeks ago, are profound: any model that projected that US spending will be fueled by "savings" can now be trashed. And since this is most of them, the consequences are dire as they confirm - once again - that the Fed is tapering, QTing and hiking right into a consumer-driven recession which was not visible until new precisely because of all the credit-card fueled spending, which according to Deutsche Bank will begin in late 2023 and which according to Morgan Stanley can start in as little as 5 months. Today's data suggests that Morgan Stanley is right.
More in the full Goldman report available to pro subs.