As another indicator of turbulent times ahead, according to recent statistics from the Federal Reserve total consumer debt, which includes credit-card debt, auto and student loans, rose 4.8% ($176 billion) year-over-year from the second quarter of last year to $3.87 trillion (not seasonally adjusted). By 2011 standards, when increases exceeded 11%, the 4.8% increase is modest; however, consumer debt has now reached its highest level ever.
Consider these statistics: in Q2 real GDP grew by 2.8% while inflation increased by 2.7% supporting the idea that consumers are continuing to boost the economy with debt. Credit Card debt and other revolving lines of credit rose 5% year-over-year to $1 trillion, auto loans and leases for new and used vehicles rose by 3.6% year-over-year to a record $1.13 trillion, and student loans jumped by 5.8% year-over-year to $1.53 trillion. In fact, since Q2 of 2008 consumer debt has increased by 48% as the consumer price index increased 15.1% and the economy grew at 17.8%.
A thought to consider is what are the driving forces and their potential outcomes. On the one side, the robust economy of recent has made consumers more confident that they will be able to service their debt for years to come. Alternatively, however, the most vulnerable 25% on the consumer-credit scale pay a disproportionate amount in expensive debt to make ends meet. Both scenarios are likely to be unsustainable in the long-term, particularly as the market enters a period of correction.