US: Consumer Credit Moderates, Trend Remains Strong

Consumer credit fell short of expectations in October with a $13.2 billion gain. Despite the moderation, the overall credit trend remains strong with gains still being led by nonrevolving credit.

Credit Falls Short of Expectations

Consumer credit fell short of expectations for the third-straight month in October, increasing $13.2 billion—more than $3 billion less than consensus expectations (top chart). On the heels of an extremely strong November employment report, and in addition to an upward revision to third quarter GDP growth from stronger real consumer spending, this smaller-thanexpected gain comes as somewhat of a surprise. Nonrevolving credit contributed $12.3 billion to the headline number, while revolving credit contributed just $0.9 billion.

Nonrevolving Credit: Concerns About Auto Lending?

Nonrevolving credit, composed of student loans and auto loans, has continued to lead growth in overall consumer credit since the past recession. This month’s contribution of $12.3 billion, or an 8.1 percent year-over-year gain, is roughly in line with the rates of growth seen over the past several months. Auto lending has expanded quickly in recent quarters (rising 8.6 percent in the third quarter compared to a year ag0) yet default rates for auto loans have started to creep up (middle chart). This poses a risk to additional growth in the auto lending market, if lending institutions were to refrain from easing credit further or become less willing to lend due to increased default rates.

Revolving Credit: Weighed Down by Confidence

Revolving credit, which has picked up steam in recent months, moderated slightly in October with a $0.9 billion gain, enough for a 3.1 percent yearover-year rate of growth (bottom chart). Made up of primarily credit card lending, typically used for more discretionary purchases, revolving credit is a typically volatile series that can fluctuate depending on consumer confidence and other economic conditions. Given the recent down tick in consumer confidence in November, it is likely that consumers avoided making sizeable purchases on credit cards due to uncertainty about the future. In fact, consumers’ assessments of the present economic situation and expectations for the future declined sharply in the recent consumer confidence report. We suspect that these confidence drops were mainly due to a torrent of bad global news in October, and that confidence (and in turn, revolving credit) should recover in coming months. In addition, as consumers ramp up spending for the holidays, they will likely use credit card lending to support the additional spending.

Overall Credit Situation Appears Healthy

Although the consumer credit report has come in below consensus expectations over the past few months, overall credit is still expanding at a healthy pace, with little reason for concern. Year-to-date, consumer credit has expanded by an average of $18.1 billion per month, far higher than the $14.5 billion and $14.0 billion monthly averages seen in 2013 and 2012, respectively.