How to Read the Increase in Consumer Credit Outstanding

By at 7 June, 2022, 2:55 pm

Is the trend in revolving credit growth healthy or not?

by Raymond J. Keating –

According to the Federal Reserve’s latest report, consumer credit has been expanding at a rapid pace (seasonally adjusted annual rate).

Consumer credit grew by 10.1 percent in April, and that was after a 12.7 increase in March and 9.2 percent in February.

While nonrevolving credit (e.g., “motor vehicle loans and all other loans not included in revolving credit, such as loans for mobile homes, education, boats, trailers, or vacations”) growth was decelerating some – for example, 8.5 percent in February, 7.6 percent in March and 7.1 percent in April – growth in revolving credit (mainly, credit cards) has been blowout strong. It registered 19.6 percent in April, 29.0 percent in March, and 11.5 percent in February. Looking at the data by quarter, the first quarter growth in revolving credit was 16.8 percent, which was up from 12.7 percent in the fourth quarter 2021 and 8.3 percent in third quarter 2021.

The question, of course, is the following: Is this trend in revolving credit growth healthy or not?

Given that inflation is running red hot, part of this merely reflects the increase in prices. But are people also using credit card debt to maintain spending or even to stay afloat? That seems to be the case for many according to a variety of reports. To the extent that this is occurring, it could spell trouble for consumers, especially if, or when, the economy slips into a recession. Of course, the worst case would be high inflation and a recession.

To the degree that the rise in consumer credit, however, reflects confidence among consumers in terms of the labor market, and along with that perhaps activity linked to a further opening up of the pandemic economy, then that is less of a worry.

But make no mistake, either way, no matter the expectations, the coming economic realities will dictate how this plays out in terms of the well-being of consumers. If growth gets back on track and inflation comes down, that spells good news on all fronts, including regarding credit. But again if the current bout of stagflation persists or gets worse (such as the economy actually slipping into recession), then this recent jump in consumer credit warrants closer watching.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.




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