Let the Good Times Roll: Consumer Credit Surges in October

Source: http://www.flickr.com/photos/ameriswede/

Source: http://www.flickr.com/photos/ameriswede/

Total consumer credit outstanding in the United States increased at a seasonally adjusted annual rate of 7.1 percent in October, according to data released by the Federal Reserve on Friday afternoon. Non-revolving credit (mostly car and student loans) once again led the increase, climbing at an annual rate of 7.5 percent. Revolving credit (such as credit cards) increased at an annual rate of 6.1 percent.

October’s increase amounts to a total credit expansion of $18.2 billion, above economist expectations for an expansion of $15 billion. Total credit flow of $218.2 billion was up 11.6 percent on the month.

Revolving credit growth, which is one indicator of consumer confidence and spending, has been pretty touchy for most of the recovery. October’s 6.1 percent spike is enormous compared to September’s 0.3 percent contraction and August’s 1.4 percent growth. Revolving credit expanded just 0.4 percent in the third quarter following a 1.2 percent increase in the second quarter.

The graph below shows total revolving credit owned and securitized in red and the annual growth rate of credit card and other revolving loans in blue. At a glance, it’s easy to see that total revolving credit outstanding is well below the pre-crisis peak (and that credit expanded tremendously ahead of the crisis before crashing); that growth has been somewhat fickle since first turning positive in 2011.

In general, increases in consumer credit indicate a willingness to spend on the part of consumers, which is prerequisite to economic growth. When consumers borrow within their means in order to purchase cars, go to college, or buy a house, the economic engine putters on contently. The obvious downside risk is that when people borrow beyond their means and assume too much debt relative to their income, they may be forced to stop spending simply to pay off debt. This is a negative economic catalyst.

One way to measure whether consumers are borrowing within their means is to look at debt service payments as a percent of disposable personal income (personal income that is left over after taxes). After peaking at nearly 13.5 percent in the fourth quarter of 2013, this rate plummeted in the wake of the crises and currently sits below 10 percent, the lowest since at least 1980, when the Federal Reserve began tracking this data (in blue on the graph below).

The delinquency rate on credit card loans has also plummeted since peaking near 6.8 percent in the second quarter of 2013. At 2.52 percent, credit card delinquencies are at record lows.

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