US Consumer Credit Hits Record $5.19 Trillion: The Debt-Fueled Illusion of American Prosperity

The American consumer is not thriving. The American consumer is borrowing.

And the latest numbers from the Federal Reserve show that the economy is in a lot more trouble than the big retail sales numbers make it seem.

In September, US consumer credit grew by $29 billion, bringing the total to a new high of $5.19 trillion.

This is not a story of trust. It's about how to stay alive in an economy where prices won't go down, wages haven't kept up, and the Federal Reserve has no more room to move.

The Headline Numbers: Records Across the Board

The September report makes it clear.

Consumer credit grew for the seventh month in a row, adding $125 billion in new debt during that time. The amount of revolving credit, which includes credit cards, rose by $16 billion to a record $1.37 trillion.

This is the biggest monthly rise since November 2023. Credit that doesn't change hands, like student loans and car loans, rose $12 billion to a record high of $3.86 trillion.

Most people thought the increase would be less than $11.5 billion. In other words, Americans are borrowing money at almost three times the rate that economists thought they would.

Why This Is Happening: Inflation Has Not Been Defeated

The economic and political situation is important in this case.

At their October meeting, the Fed kept the federal funds rate at 3.75%–4.00%, even though two members wanted to raise it.

Chairman Kevin Warsh has said that household budgets have become tighter, but he hasn't said that they are now "tight enough."

At the same time, the September CPI rose faster than expected to 3.7% year-over-year, thanks to a 34.2% rise in gas prices. In September, real personal spending stayed the same, or grew by 0%.

The United States is spending more money on things that are the same or less valuable, and plastic is helping to close the gap.

The Delinquency Time Bomb

This is where the data goes from being worrying to being very scary.

The people who hold this debt are more important than the total amount. The poorest half of US households, those with the least amount of money, own only 5% of household assets and 0.6% of corporate stocks, but they have 51.6% of all consumer loans.

These are the homes that are least prepared to handle a shock. The percentage of credit card balances that are seriously late - 90 days or more - has reached 12.8%, which is close to the peak of the housing crisis in 2010.

Auto loan defaults are at their highest level ever, and people over 70 are subject to the highest number of defaults since 2000.

Nearly 9% of households now pay off debt with more than 40% of their income. This is the highest percentage since 20101.

The Fed’s Dilemma: Trapped Between Inflation and Instability

The Federal Reserve is caught. At 3.7%, inflation is still almost twice the target of 2%, but higher interest rates are already having an effect on credit markets.

In October, Chair Warsh said that credit spreads for some assets have grown and that people in the market are becoming "more discerning."

Fed's rate hike in September and pause in October show that the committee is aware of the risk of tightening too much.

But since inflation is staying high and oil prices are changing all the time, the Fed can't really signal a change.

Rates are high enough to make family budgets tight, but not high enough to stop inflation. This is a holding pattern that doesn't help anyone.

What This Means for the Holiday Season

The timing is not good. EY-Parthenon predicts that Christmas sales will rise 5.2% to $1.08 trillion, which will be the biggest rise since 2021.

But the same poll also found that 42% of people are more stressed than last year about being able to afford gifts and 14% expect to carry holiday-related debt into 2027.

Bain thinks that higher prices, not more sales, will account for more than half of the holiday sales growth.

To put it another way, the holiday season will look strong on the surface, but people will actually be spending less on restaurants, entertainment, and electronics to pay for gifts.

The fact that consumers have borrowed a record $5.19 trillion is not a sign of faith in the US economy.

The households that are under the most stress are the ones that don't have much of a safety net. This is shown by the delinquency data.

The next meeting of the Fed, in December, will be very important. If inflation rates don't drop significantly between now and then, the committee may have to make another hike, even though the bottom half of households are already having a hard time paying their debts.

That's not a smooth landing. That is a slow hole.

And the American consumer is running out of gas, even though the big numbers on spending show otherwise.