The Fed released its G.19 report on Consumer Credit last Thursday, and it stirred some optimism (see also here):

The new U.S. consumer credit numbers reflect an economy that is reaccelerating, and that is very bullish for growth — as well as inflation. All in all, U.S. household credit surged by $7.62 billion in February, ramping up faster than at any other time since June 2008.

I respectfully beg to differ.  While the story gives a passing nod to the rise in student loans, the fact of the matter is that student loans are virtually the whole story, and the downward trend/trajectory in credit, save that category, has really not reversed.

Let’s have a look:

What we’ve got above is Total Revolving, Total Non-revolving, and Total Non-revolving minus TOTALGOV (the category that includes student loans).  Without the increase in student loans — which is to say the green line and the blue line — the trend in credit (both revolving and non) continues downward.

But let’s take a look at exactly how much the TOTALGOV (i.e. Student loan) series is goosing non-revolving credit:

It is, quite literally, a reverse cliff-dive.

In short, fade the notion that consumer credit is experiencing some sort of credit renaissance and that happy days are here again.

That said, we are indeed moving in the right direction, as these two indicators of leverage clearly show (below).  So there would appear to be light at the end of the tunnel.  We’ve got a way to go, for sure, but progress is being made.  When the consumer credit cycle does eventually turn it is my belief that, for a variety of reasons — such as demographics and the lessons (hopefully) learned by today’s younger adults –  it will be fairly weak.

Category: Consumer Spending, Credit, Current Affairs, Data Analysis, Economy, Finance

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12 Responses to “Fade the Consumer Credit Headline (For Now)”

  1. vader says:

    That is until the folks graduate and have to pay off those loans while working at sub optimum jobs.

  2. Global Eyes says:

    I used to think consumer credit was the ultimate drug. Maybe I should add student loans to that list on the grounds that they produce a near-term high that quickly disappears leaving the user feeling like a lousy investor.

  3. bulfinch says:

    I think I recall it being put forth/shot down here before that the trend downward in household debt has been helped in part by defaults and write-offs in the last two years, but I still have to wonder.

    Despite the last chart, I cannot ignore what is most readily perceptible to me: Americans still have muscle memory for the over-the-barrel position. What is more , they defend it as sound behavior and recoil at notions such as saving or deferred gratification like it were an invitation to sit on a fire ant hill without their pants.

  4. BennyProfane says:

    What’s the interest rate on most of those student loans taken out over the past few years?

  5. DeDude says:

    I am not sure it makes sense to take out the student loans (by subtracting TotalGov). It is simply representing a shift from private sector to government sector of one piece (student loans) of the non-revolving. I don’t think that student loans (private+public) have increased that dramatically. For the economy it makes no difference whether the activity is in government or non-government sectors. Total non-revolving credit is increasing slightly that is what matters. The main reason is probably that people no longer can (or will) put off that new car purchase, and banks are more willing to indulge them. That said, I do not think happy days are here again, because both consumers and banks are going to be more careful about going overboard (as seen in the lower revolving credit).

  6. mezcal says:

    Convenient that student loans can’t be easily discharged via BK, yes?
    Pure coincidence I’m sure.

  7. bulfinch says:

    “…consumers [...] are going to be more careful about going overboard.”

    Evidence to this effect is just not readily perceptible to me.

  8. ashpelham2 says:

    I’ve certainly been adding to my debt position this year. And to back up what one poster said, we simply could not put off a new car purchase. However, we did as we always do: carefully determine what type of vehicle we needed, and then found the best deal we could on a used model of that vehicle. While I couldn’t pay cash for it, I did take a new job with a 40% pay increase, thereby making the debt service palatable. Furthermore, did write a decent size check to pay in full some other debts, so our monthly budget requirements changed very little.

    It feels weird to be borrowing money again, after so long, not borrowing a cent. It’s not an open invitation for a credit binge party. Simply solved one problem with a low interest rate loan on a good, dependable piece of used transportation.

  9. advocatusdiaboli says:

    Is it really a good step or does that last chart reflect an over-weight of bankruptcies and ruined credit through mortgage write-offs? Mortgages count in that debt figure no?

  10. [...] Monday’s note): And it remains a legitimate question as to how we end up with inflation as credit contracts. Not just in the consumer and housing sectors, but in the government sector too. The state and [...]

  11. Brendan says:

    I saw this article the other day:

    It makes a couple of good points alluded to above – are these expensive University of Phoenix type educations paying the dividends necessary to pay off the loans. Heck, I have a supposedly pretty desirable degree (engineering) from a state university and spent the last year out of work (or at least work that requires a college degree). Luckily my loan is pretty small thanks to in-state tuition rates, dragging the loan out 20 years and its sub-inflation-rate (1.25%) loan rate. Also it’s the only loan I have, so I could continue paying it even while making high-school diploma wages. You can also make the argument that the degree has already long paid for itself in previous earnings. However, if I had paid U of P prices for a less desirable degree, I might have been in more trouble. How many of these are going to end up in default?