There is growing concern as to whether or not the American consumer can continue to prop up the U.S. economy. One place to look for answers is in data on consumer credit, which can be an important indicator of consumer spending on services and durable goods. Solid gains in consumer credit growth are an integral part of our sanguine outlook for near-term consumer spending. The latest consumer credit report, released by Federal Reserve, shows that total outstanding consumer credit reached an all-time peak of $3.54 trillion in January, increasing 6.5 percent from a year ago. Borrowing from credit cards remained constrained declining $1.1 billion from the month before and the first monthly decline since February 2015 – but we are not too concerned about that drop.
The severe winter weather conditions in January likely prevented consumers from doing as much post-holiday shopping as they normally do. At the same time growth in real wages and personal income partially substituted credit card use. Real personal income increased at a healthy 5.3% annual rate in January. Growth in non-revolving credit, mostly auto and student loans, remains robust. Non-revolving credit is now $1.67 trillion higher than revolving credit outstanding versus only $613 billion a decade ago and $253 billion a decade prior to that.
Pent-up demand for new vehicles and the need to increase educational credentials in the wake of the “Great Recession” is a big driver of this new phenomenon in consumer credit. But consumers are also more comfortable taking on lower interest non-revolving debt, tending to avoid higher interest credit card debt as many felt the sting of high interest expenses when the last recession struck. Despite increases in consumer credit outstanding in recent years, household debt has been brought under control in the aggregate, giving the green light to additional consumer borrowing in the future. The latest “flow of funds” data, released by the Fed shows household debt as a share of disposable income has been holding near 105% in 2015, more than a 25 percentage point reduction from its 2006 peak.
More evidence of the consumer’s ability to spend and borrow comes from the household debt-service ratio, which shows how much money U.S. households need to set aside to service their debt. The ratio was at 10.1 percent in the last quarter and has been holding near historical lows for about 3 years now. Rising personal income and the low interest rate environment have been instrumental in alleviating the financial burden of U.S. households during this expansion.
The only area of concern that remains is the large buildup in student loan debt that grew tenfold in the last decade. Including government guaranteed private loans; total student loans outstanding have climbed to $1.32 trillion. Rising debt payments or default rates on student loans could leave less capacity for consumer borrowing and spending in the future.
To learn more, check out this week’s US Outlook Report.
Tags: economy, finance, united states