Modest Consumer Credit Growth in May Supports Spending

Consumer credit rose $19.6 billion in May, with nonrevolving credit comprising the majority of growth. Following extremely strong gains in April, overall credit conditions continue to improve. 

Lower Rates, More Credit, Better Consumer Spending

Consumer credit expanded $19.6 billion in May, falling short of the consensus expectations for an increase of $20.0 billion. This increase comes on the heels of a huge rise to credit in April—$26.1 billion after revisions—and indicates that despite the lower-than-expected reading in May, consumer credit is faring quite well. 

Nonrevolving credit composed $17.8 billion of the total $19.6 billion credit increase. Nonrevolving credit is made up of student loans and auto loans and currently accounts for almost three-quarters of all consumer credit outstanding. The auto loan rate for a 48-month new car loan, which in Q2- 2013 had fallen to a historical low of 4.13 percent, has slightly reversed trend, and ticked up to 4.50 percent in Q2. Auto loan rates remain far below the 7 percent to 8 percent range seen prior to the recession; however, further increases in the lending rate, which would make borrowing for auto loans more expensive to consumers, could potentially stifle lending demand and growth in nonrevolving credit. 

Revolving credit is a fairly volatile series, as it is primarily made up of loans for credit cards and other discretionary spending. Revolving credit increased $1.8 billion, following an uncharacteristically-large increase in April of $8.8 billion. On a year-over-year basis, revolving credit increased 2.2 percent, indicating continued demand strength despite the smaller gain in May. 

Lending for credit cards and other discretionary spending can vary for a multitude of reasons, as demand fluctuates based on changes in the economy. Loan supply also varies based on lending standards and the economic sentiment of financial institutions and the Federal government. According to recent data from the Senior Loan Officer Opinion Survey, a net positive amount of banks are easing standards while also seeing increased demand for credit card loans. Given the easy lending conditions, revolving credit is set for expansion as the economic recovery gains steam. 

Too Much of a Good Thing?

Consumer credit as a percent of disposable personal income reached another all-time high at 24.8 percent. Although the continued rise in lending raises the question of consumers’ ability to pay off debt, charge-off data imply that there are no serious concerns with increases in this level of borrowing. Data from the Federal Reserve and Moody’s both show a downward trend in charge-off rates despite the pickup in borrowing. 

Our outlook for consumer credit remains bright moving into the second half of 2014. Following weak economic growth in Q1, we expect a pickup in real growth in the following quarters that should further spur demand for lending.