Give this consumer some credit

Summary

In a week of limited data flow due to the federal government shutdown, we provide an update on the state of household finances and consumer reliance on credit. Consumers keep spending and they may soon increasingly tap credit to do so.

Where credit is due

Consumers increasingly relied on credit to spend in the wake of the pandemic, but borrowing has slowed over the past few years. Total consumer credit expanded at the slowest pace in six months in August keeping the overall growth trend rather tame. The weaker take up during the month was due entirely to revolving credit (mostly credit cards), which has been volatile, slipping at a 5.5% annualized rate during the month after jumping north of 10% in July. Nonrevolving credit, which covers things like auto, student and personal loans, expanded at a 2.0% annualized rate, in line with its pace registered over the past six months.

The lackluster trend in borrowing has coincided with consumer spending that continues to show strength. Upward revisions to GDP growth released mid-September revealed a stronger pace of consumption in Q2 and monthly spending data through August suggests spending is on track to grow at an even stronger clip in Q3 (~3% annualized pace). While consumers are worried about their job prospects and tariff-induced price pressures, they have continued to spend. The question now is to what extent consumers will again rely on borrowing to fund purchases amid slower growth in disposable income.

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