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August 2nd, 2012

Revolving credit posted a surprise $8.0 bln gain in May, more than in the prior eleven months combined. The corresponding annual rate increase (11.03%) was the highest since November 2007, a month before the economy last lapsed into recession. The early consensus from the Reuters economist poll calls for total consumer credit to rise another $12.8 bln in June. That would be the fourth straight double-digit monthly advance and push the level to a record $2.584 tln. The source and size of growth in consumer credit continue to fascinate dealers. Some think the expansion in the level of credit outstanding is a reflection of improving labour market conditions and consumer confidence while others believe it is a re-leveraging of household balance sheets that will ultimately be unwound in an unpleasant way.

Societe Generale Cross Asset Research sees the non-revolving credit category resuming its leadership but this time being the sole contributor to the rise in June debt demand. SG economists wrote Thursday, “Capped by a near stalling of revolving loan growth, consumer installment credit probably expanded by $10.5 bln in June. The Federal Reserve’s monthly report on commercial bank assets and liabilities revealed that credit card and other revolving consumer loans contracted by $106 million during the reference period, following a $12.8-billion expansion over the April-May span. Our projection, if realized, would place the nominal value of consumer credit at $2.583 tln in June, $188.2 bln above the cycle trough set in August 2010 and just $85 mln shy of the record high level set in July 2008.”

Macquarie Economics Research recently wrote, “On top of a lesser impact from the expiry of unemployment insurance eligibility and the declining effect of warmer winter weather, consumer incomes should provide a boost to growth in 2H. The combination of higher wages, greater consumer credit activity, a lower gasoline price, and elevated mortgage refinance activity all point towards this. A renewal of the flow of credit and appetite to borrow should augur well for consumer spending in the months ahead.”

According to the Federal Reserve’s latest Beige Book released on July 18*, “The Atlanta, Chicago, Dallas, and San Francisco Districts observed steady-to-increasing demand for consumer credit, especially for auto loans, while consumer loan demand was somewhat weaker in Kansas City and little changed in Cleveland.” In the prior Beige Book, by contrast, “Demand for consumer credit appeared largely unchanged.”

* Prepared at the Federal Reserve Bank of Atlanta and based on information collected from businesses and other contacts outside the Federal Reserve before July 9, 2012.

IFR Markets said of the May jump, “Nonrevolving credit began hitting new highs in January 2011. Revolving credit has been much slower to recover, having only bottomed in April 2011. It’s now up 2.3% since then, but still down 15.4% from the July 2008 peak. While these numbers are volatile and subject to large revisions, it would seem to imply that consumers continue to become comfortable with the states of their balance sheets, even as the savings rate edged up from 3.7% to 3.9% in May. While broader economic conditions are weak heading into summer, continuing improvement in credit market health remains a positive underlying trend.”

Goldman Sachs Global Investment Research listed the year-ago change in revolving credit as one of the macro drivers of spending that is stabilizing. Indeed, despite revolving credit having grown only twice in the last five months, its 12-month growth rate rose in May to 1.53%, the highest in 3.5 years. GS also cites the fall (to the lowest levels since the mid-1990s) in debt service payments as a percentage of growth in disposable personal income. Nominal DPI rose by 3.2% in the 12-months to June, the fastest rate in eight months. Real DPI advanced at a 3.3% annualized rate in the second quarter, very close to its 3.4% AR in the first quarter. Not surprisingly then, Goldman Sachs also includes the year-ago changes in nominal DPI and real wages in its list of stabilizing macro drivers of spending.

The feature article in the Cleveland Fed’s Economic Trends publication was entitled “A Tale of Two Types of Credit”. Among their conclusions, the three contributing researchers offered a potential explanation for why nonrevolving credit has expanded: “Many consumers had to put off the purchase of large-ticket items, such as cars, during the recession, and now they feel comfortable making such purchases. Data suggest that there is pent-up demand for cars. As the economy recovers and consumer balance sheets continue to heal, consumers are likely to replace the durable goods they put off purchasing during the recession. In a related concept within the same article, the authors wrote, “The household financial obligation ratio* suggests that households that put off large purchases during the recession are in a better position to make those purchases now. As of the first quarter of 2012, the ratio, which measures a household’s financial obligations relative to its disposable income, has fallen for 12 consecutive quarters to its lowest level since June 1984. Such a low ratio may mean that consumers have repaired their balance sheets to the point where they feel comfortable in financing large purchases again.”

* includes automobile lease payments, rental payments on tenant-occupied property, homeowners’ insurance and property tax payments.

The Federal Reserve will report June consumer credit data at 15:00ET on Tuesday, August 7. Even though revolving credit has the minority share (about a third) of the total, its progression is important in measuring the overall health and manageability of consumers’ debt loads. Accordingly, dealers will scrutinize the composition of the change in total consumer credit for evidence of either a retrenchment or pickup in consumer spending in the second half of the year.


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