The Real Story Behind Consumer Credit

Last week we heard that consumer credit (consumer borrowing) had “improved” substantially in May, which was said to be a very positive economic indicator. Overall, the Fed reported, such credit increased 8.0% overall on an annualized basis.

The “news” out of this report was about revolving (mostly credit card) debt which increased 11.2% on an annualized basis. The implication, we are told, is that this is a sign of the consumer coming back because they borrow when they feel more confident about their economic situation.

This is not the correct view. In fact, if anything, it says that consumers have more debt because they are behind on their credit cards and are having problems paying their bills. After all credit card credit is the amount you owe your bank on your card.

Consumer borrowing is broken down into revolving credit such as credit card debt, and nonrevolving credit such as auto loans. Here is the Fed’s G-19 report showing overall credit, seasonally adjusted:

First, we need to understand what these categories mean. Here’s a cheat sheet:

Bank revolving debt = credit card debt

Bank nonrevolving = auto loans

Credit union revolving = personal credit lines, credit card debt

Credit union nonrevolving = auto loans

Finance company revolving = personal loans

Finance company nonrevolving = auto loans, secured personal loans (furniture, appliances, braces, Lasik eye …)

Nonfinancial revolving = store credit  

Federal government = student loans

These are rough definitions and aren’t all-inclusive, but close enough for my purposes. Remember we are discussing loans for consumers, not businesses or loans for business purposes.

Here is a synopsis of the Fed’s G-19 data broken down by the type of lender (in billions):

Of the $2.525 trillion in consumer credit for May, roughly ⅓ is revolving debt and ⅔ is nonrevolving debt. Credit card debt and debt related to personal unsecured loans and store credit, which is what the excitement was about, amounted to about 30% of the total debt for May. That means that about 70% was for nonrevolving debt, specifically, auto loans were 47% and student loans were about 18.4%. Note, I am excluding pooled loans for purposes of simplicity. But the total increase of credit card type debt for May was only $7.5 billion more than April. In the total scope of things, that is only 0.3% of total consumer credit for May. If you annualize that, it’s a 3.6% annual increase. Not much to get excited about.

The story that should have been reported was that consumer credit card debt (seen as discretionary spending) was basically flat, showing at best a very humble gain. Instead what was more significant is that record low interest rates are driving auto sales right now, and that boosted such debt by 3.2% in May, or, on an annualized basis, 38.4%. Thus, the auto industry is relying on ZIRP to fuel sales. One wonders what the case would be if interest rates rose.

Also, student loan debt continues to grow, up 1.4% in May, or, on an annualized basis, up 16.22%. Increases in student loans reflect the pressure on families to support their student children and a desire to stay in school to wait out the economy. Remember, student loan debt is not related to organic economic growth, it is merely a transfer of taxpayer funds, so one could say that it does nothing for the economy short-term.

Things are never as they seem, at least when interpreted by the mainstream media. Reports of a consumer comeback are not true.