Retail sales numbers confirm household debt is fuelling US growth

Yesterday, I mentioned I thought that a return to debt fuelled consumption growth was what had underpinned the US economy. My argument was that "when it comes to the balance sheet recession and deleveraging, policy makers have abundant ways to forestall the inevitable reduction in debt ratios." And indeed, they are trying to execute what Larry Summers gave voice to last year when he said "the central objective of national economic policy until sustained recovery is firmly established must be increasing… borrowing and lending.” You get that? Summers wanted to increase credit growth. And so we have.

Here’s the thing though, the growth in credit is out of all proportion to the underlying economic growth and that tells you households are releveraging. That leverage is boosting retail sales:

Retail sales in February jumped at the fastest pace in five months, spurred by higher spend at auto dealers, gas stations and clothing stores.

Retail sales advanced 1.1% from a month earlier, in line with economists’ forecasts. Sales are also up 6.5% from a year ago.


Incomes are not up 6.5% in the latest year. So consumers are reducing savings and releveraging to spend because not only are savings rates near zero but also because at this point in the cycle consumers feel more confident about their job prospects. This is good news from a cyclical perspective but very bad news from a systemic perspective. Clearly, savings rates are already too low and debt levels too high in the household sector. So a releveraging means a more draconian deleveraging when the cycle turns down.

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