One of the striking changes to US consumer behavior spawned by the economic shutdowns from the coronavirus pandemic, was the unprecedented surge in personal savings which exploded to a record 32% of disposable personal income before easing modestly last month to 23.2%.
Now, thanks to the latest consumer credit data released by the Fed, we know what much of that saving went to: paying down debt.
According to the Fed's latest G.19 statement, in May, total consumer credit tumbled by another $18.28 billion, which while less than the record $68.8 billion crash in April, was far below expectations for $15 billion drop.
Just like March and especially April, most of the credit repayment took place in revolving credit which shrank by another $24.3 billion in May (after declines of $21.5BN in March and $58.2BN in April) as US consumption literally went into reverse and instead of spending wildly as it does every other month, usually spending what it can't afford, US consumers repaid the most on their credit cards ever.
In fact, over the past three months, US consumer have paid down a staggering $104 billion in credit card debt, bring the total outstanding credit card debt below below $1 trillion. Indicatively, the first time total credit card debt hit $1 trillion was back in December 2007, which means that the deleveraging of the past 3 months has sent US credit card balances to a 13 year low!
At the same time, there was a modest return to normalcy in non-revolving debt, i.e., student and auto loans, which after plunging by a near record $12 billion last month, has again rebounded and was up $6 billion in May.
Going back to the aggressive repayment of credit card debt, that is quite an ominous development for a US economy which is 70% reliant on stable - in many cases credit-card funded - consumer spending. Ominous, but not unexpected, because in a time of virtually no visibility on job prospects and how the pandemic is resolved, instead of doing what they do best, i.e. spend, Americans not only saved money but also went into credit paydown mode, crippling an economy where 70% of total output is a direct result of consumer spending; and needless to say, the tens of millions of Americans (depending on whether one believes the initial claims or the BLS jobs report) who have lost their jobs are not going to go out and spend like drunken sailors any time soon.
So how long until this shocking plunge in consumer spending reverses? The answer is that nobody knows, but until US consumers feel comfortable enough to once again "charge it", there can be no recovery.
What we find most surprising, however, is that in this day and age when the Fed has effectively institutionalized moral hazard and where failure is no longer punished as capitalism is now officially dead and zombie existence is rewarded, Americans still care enough about their credit rating to pay down their own debt even as corporations and the country go on a historic debt issuance spree which everyone knows will never be repaid.
Our advice to Americans with credit cards: go crazy, after all if everyone defaults - and gets a default - it's the same as nobody defaulting.