Hurricanes Harvey And Irma Will Boost Consumer Credit Outstanding

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by: Steven Hansen

Summary

There is a general correlation between consumer credit and GDP.

Of course, there is a concern that economic activity related to natural disasters is positive economic activity.

Worse, the average Joe carries the burden of repair and replacement.

There is good correlation between consumer credit growth and GDP - except during the 2001 recession.

The comparison of the year-over-year growth of consumer credit growth (with student loans removed - blue line) to GDP (red line) is shown in the below graph.

Consumer credit is the grease of the economy.

Is all this going to be changed by Hurricanes Harvey and Irma? Most consumers with damage must borrow money to repair the damage to their residences and their cars. Expect a surge in consumer credit outstanding over the coming months. [Note that certain types of equity loans will not appear as consumer credit - consumer credit does not include home mortgages.]

Living in South Florida, we were affected by Hurricane Irma. In my case, we suffered no real damage - and there was little damage around us even though gusts neared 100 mph. But the economic affects are tremendous. Beginning Thursday 07 September - the Florida economy collapsed. Little was left in stores or gas stations and schools closed. A week later, a significant portion of small business still has no power or deliveries. So in the short term there will be a loss to the economy as 10% of the population of the USA was affected by Harvey and Irma.

My view is that disasters have a certain economic cycle:

  • additional spending to prepare for a disaster (if applicable) - less money to spend on other things this month
  • the absence of economic activity during the disaster and the immediate aftermath
  • spending to repair or replace. If it was cash/savings, less to spend on the iphone X. If it was bought on credit, likely one has the money for the iphone X.
  • those that borrowed to pay for repairs or replacement, will have less mony to spend in the future in order to repay the loan.

The fact is that the average Joe was screwed by Harvey and Irma. Income was lost, and money that did not need to be spent will be spent. Disaster costs seem good for the economy in the medium term but really bad for those affected. So numbers may get added to GDP but is the economy really helped? Bastiat called this view of economic benefit the Broken Window Fallacy. And there were a lot of broken windows (among other things) as a result of Harvey and Irma.

For a complete recap of our analysis of consumer credit is [here].

My usual weekly wrap is in my instablog.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.