Consumers Borrowing at a Faster Rate, Support for Spending

Consumer credit continues to expand at a decent clip and upward revisions show more borrowing than initially reported. This suggests improved confidence from the consumer and should support spending.

Solid Gain and Upward Revisions 

Consumer credit increased by $19.1 billion in July, following upwardly revised gains in previous months. These gains put the year-over-year growth rate at 6.8 percent and the three-month annualized rate at 8.2 percent, indicating the series is accelerating. Revolving credit grew 3.9 percent over the year, a growth rate near its cycle high. The year-over- year change in nonrevolving credit, however, continued to moderate in July. Revisions boosted total consumer credit outstanding by $12.2 billion. We expect consumer credit to continue to increase as a stronger economy and an improved household financial situation offset any drags realized from higher interest rates and volatility in financial markets. 

Revolving Credit’s Recent Strength Set to Continue 

Revolving credit, which is largely comprised of credit card debt, fell rapidly during the recession and took much longer to rebound when compared to nonrevolving credit. In fact, revolving credit still remains a sizeable 10.4 percent below its prerecession peak. The fact that revolving credit declined more, and was slower to rebound, relative to spending suggests that there was more to the story than a simple lack of spending by consumers to explain the sluggish revolving credit data. Higher delinquency rates and decreased access to credit likely contributed to the slow rebound. 
Credit card delinquencies have since declined steadily and lending standards have eased considerably. On net, banks have eased standards for credit card loans for the past 21 quarters. This, combined with our expectation for stronger consumer spending and incomes, leads us to believe revolving credit should show sustained growth through the end of 2015 and 2016. That said, recent volatility in financial markets and worrisome headlines regarding the global economy will likely affect consumer confidence. This could spill over to spending on credit cards, and could lead to a temporary slowing of revolving credit growth. These headwinds should prove transitory for consumer credit, however. 

What to Expect From Nonrevolving? 

Nonrevolving debt, largely comprised of student and auto loans, should also post continued growth in the months ahead. Auto sales were once again strong in August, which points to continued growth. Although we are looking for auto sales to moderate in 2016, light-vehicle sales should still remain at a relatively high level. Student loans are more concerning, as delinquency rates have not shown cyclical improvement like other forms of consumer credit. That said, much of the gain in student debt is financed by the federal government, which could support credit in this sector despite increasing delinquencies. We expect the gap between growth rates of nonrevolving and revolving credit to continue to narrow.