PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Consumer Credit Continues to Grow, Albeit More Slowly

By at 8 August, 2017, 11:10 am

by Raymond J. Keating-

Consumer credit outstanding offers a hard-numbers take on consumer confidence. The latest data from the Federal Reserve says that consumer credit continues growing, but at slower rates.

Consumer credit, excluding loans secured by real estate, are split between revolving credit (mainly, credit cards), and nonrevolving credit (includes, as noted by the Fed, “motor vehicle loans and all other loans not included in revolving credit, such as loans for mobile homes, education, boats, trailers, or vacations”).

In terms of the latest numbers, revolving credit grew at an annual rate of 4.9 percent in June, down from 8.2 percent in May. For the second quarter, revolving credit grew at 4.6 percent, up ever so slightly from 4.5 percent in the first quarter, but down versus the 6.4 percent rate for 2016. In addition, it is worth noting that after nine years, revolving credit outstanding in June finally climbed back to and just ahead of the high registered in mid-2008 (see Chart 1).

As for revolving credit, it grew by 3.5 percent in June, down from 4.9 percent in May and 5.0 percent in April. During the second quarter, revolving credit grew by 4.5 percent, down from 5.2 percent in the first quarter, and from 6.5 percent in 2016.

It also is worth pointing out that personal consumption expenditures in the GDP data have shown underwhelming growth. While it was good to see real consumer spending step up growth in the second quarter, from 1.9 percent in the first quarter to 2.8 percent in the second, in seven of the last eight quarters, real growth in personal consumption expenditures has run below the 3.1 percent average real rate prevailing over the past 50 years.

Interestingly, the recent growth numbers in terms of consumer credit outstanding and consumer spending stand somewhat in contrast to the jump up experienced in consumer confidence that occurred after the 2016 election. The University of Michigan Consumer Sentiment Index jumped from 87.2 in October to 93.8 in November and then climbing to 98.5 in January of this year, which was the highest level since January 2004. It has since retreated a little, but remains well above the October level (see Chart 2).

So, there appears to be at least some disconnect between consumer sentiment, and consumer credit and spending. As we have noted before, it must be noted that consumers are followers. That is, when the economy is growing at a strong pace, entrepreneurs are creating businesses, and businesses are hiring, consumers step up their spending. Consumers follow, they do not lead.

Consumer confidence jumped up in November and December of last year after the election, with expectations that policy changes would bring about more robust economic, income and employment growth. The White House and Congress need to implement substantial tax and regulatory relief and reform, as well as relief from crushing health costs, and when such policy changes incentivize entrepreneurs, businesses and investors, consumers will be more than happy to further step up their activity as well.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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