Strong Credit Expansion in July: Support for Consumer

Consumer credit exceeded consensus expectations with a $26 billion surge in July, while the June figures were also revised upward. Gains were broad-based among both revolving and nonrevolving credit.

Total Credit: Broad-Based Improvements

Consumer credit increased by $26 billion in July, far exceeding the $17 billion gain expected by the consensus, while June data were also revised upward (top chart). Gains were broad-based, as both revolving and nonrevolving credit saw a pickup. Following strengthening economic data and a rise in consumer confidence, it is likely that consumers have ramped up borrowing as their expectations for future growth have improved. We suspect that continued improvement in the economy through the rest of the year will lead to further gains in consumer credit. 

Revolving Credit: Fall Pickup

Revolving credit, composed primarily of credit card loans, saw a 7.4 percent annualized gain in July, contributing $5.4 billion to the overall dollar change. A typically-volatile series, revolving credit has been modest in the summer months—growing by a mere $1.8 billion in June—and it is likely that deferred borrowing in May and June could be cause for the July surge. In addition, increased spending for “back-to-school” sales could have also played a part in the rise in credit card debt, as clothing was a main contributor to retail sales growth in July.

Nonrevolving Credit: Large Gains, Modest Concerns

Nonrevolving credit, made up of student and auto loans, contributed $20.6 billion to the headline number in July. This expansion came at a 10.6 percent annualized pace, and was the largest dollar change seen in over three years. The total outstanding amount of student and auto loans has followed a steep upward path since the past recession, and currently stands at $2.4 trillion dollars, accounting for almost three-quarters of all consumer credit outstanding (middle chart). 

Continued gains in nonrevolving credit have raised concerns about the rapid expansion in the subprime auto lending market. Auto loan rates fell sharply following the recession and remain at historically-low levels. In turn, demand for auto loans has ramped up, as the cost of borrowing has become cheaper (bottom chart). Moreover, banks reported in the Senior Loan Officer Opinion Survey that they have generally become more willing to lend to consumers and have continued to ease lending standards. 

According to data from the Federal Reserve Bank of New York, 35 percent of auto loans outstanding belong to consumers with credit scores in the lowest 2 income quintiles. Following the recession, this percentage bottomed-out at just 29 percent in 2010. In contrast, the percentage of auto loans in the upper 2 income quintiles has fallen to 44 percent from 51 percent in 2010. Although charge-offs rates remain contained—just 2 percent at commercial banks—increased lending in the subprime market puts the credit market at risk for increased charge-off rates ahead.