Consumer Credit

When attempting to determine the pace of consumer spending in the economy, it is best to look at the growth rate of personal incomes, or better yet, the rate of change in real disposable personal incomes—those adjusted for inflation and taxes. The economic reasoning for watching incomes is that consumers—the largest contributor to GDP—tend to spend only what they earn. There is,

EXHIBIT 12.2 Commercial & Industrial Loans and Nonresidential Business Investment

however, an additional measure that will help explain the state of consumer affairs and the propensity for consumers to spend, the Federal Reserve’s Consumer Credit report.

Each monthly release details the outstanding levels of credit secured by depositing institutions, finance companies, credit unions, federal government, and so on. The Street focuses on the monthly change in the headline amount of total consumer credit and the pace of revolving and nonrevolving credit.

Revolving credit essentially is the level of credit card borrowing. Watching the trends in this series permits the economist to see the desire consumers have to ring the cash registers. If conditions are favorable and consumers feel good in their situations and job prospects are upbeat, then they tend to pull out the charge cards and make purchases knowing that they will have the ability to pay the balance of their purchases over time. So, if you're employed and want to buy an item that may exceed your current budget like a dishwasher, an electronic device, or an air conditioner, you will spend with the understanding that you'll have money in the future. Conversely, a credit card purchase is not likely for an individual who has been furloughed from work or suspects the future environment is not altogether promising.

The other portion of outstanding consumer credit is nonrevolving, which includes loans on motor vehicles, mobile homes, education, boats, trailers, and so on. In more recent times the levels of nonrevolving debt have escalated and grew by a faster pace than revolving. This is, in large part, due to higher prices and demand for student loans. Also, auto loans have picked up amid a historically low interest rate environment. Consumer credit is, of course, very sensitive to the underlying interest rate.

As Exhibit 12.3 shows, during more prosperous times, consumers tend to pick up the pace of borrowing and spending. In more recent times (post 2007—2009 downturn) the pace of revolving credit moved in a “sideways” pattern, advancing by a range of 0 percent and 4.5 percent from 2012 to 2016. Despite the low-interest-rate environment, consumers were still reluctant to use their credit cards since the economic climate remained miserable for so long. Revolving credit growth didn’t increase by any desirable pace until 2014, some five years after the NBER declared an end of the recession in July 2009. The pace of nonrevolving credit advanced by double digits, and then trended lower to a high-single digit pace.

Some caution is advised when using the consumer credit data. There are no mortgage-related data contained in this release, even though this is the largest “credit-related” purchase a consumer may make in a lifetime. Also, there is a tendency for revisions to alter the levels due to new sources becoming available, while the loss of other data inputs can be discontinued. Reclassification of data like some of that pertaining to student loans has also been known to inject some volatility in these figures.

EXHIBIT 12.3 Consumer Installment Credit

There are also special memo items that appear in the report on isolated values of motor vehicle loans and student loans. This appears on a somewhat delayed basis.

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