What’s Really Going On With Revolving Consumer Credit?

Except for some of the dodgy stuff in today’s headlines.

By Wolf Richter for WOLF STREET.

April revolving balances, not seasonally adjusted — actual dollar balances — were $1.04 trillion, according to the Federal Reserve this afternoon. This includes credit card balances, personal loans, etc. and was up just 2.6% from April 2019.

So take that in for a moment: Over a three-year period, revolving credit grew just 2.6%, despite 13% CPI inflation over those three years. In other words, inflation-adjusted revolving credit growth has fallen sharply.

The huge bottom between 2019 and now is due to the pandemic, when consumers used their stimulus money to pay off credit cards and cut spending on discretionary services like sporting and entertainment events, international travel, or elective healthcare services like cosmetic surgery, dentist visits, etc. During this period, arrears fell to record lows.

Revolving balances are barely above the peaks of 2007 and 2008, despite 14 years of population growth and 40% CPI inflation in those years! In other words, revolving credit just isn’t the kind of problem it was in 2008. It’s a sideshow.

In terms of growth — in terms of extra borrowed money being spent in the economy — it’s been tiny. In fact, there has been no growth since December. And after the January and February payments, after the annual Christmas shopping spree, total assets grew by just $14 billion in March and $17 billion in April, to a combined $31 billion.

That growth of $31 billion in March and April didn’t even make up for the $32 billion in amortization in January and February. These are actual dollars, not seasonally adjusted theoretical dollars.

In terms of economic growth, total consumer spending is currently at an annual rate of $17 trillion, with a T. So how much growth would the additional spending from increasing revolving credit add? That was a rhetorical question. It’s tiny.

Since 2019, consumer spending is up 19% and revolving credit is up just 2.9%, both unadjusted for inflation of 13% over the period. In other words, revolving credit growth has lagged well behind inflation and massively lagged behind consumer spending growth.

This shows that consumers are turning less to revolving credit.

Credit cards and some types of personal loans, such as B. payday loans, are the most expensive forms of credit and often associated with exorbitant interest rates. Credit card rates can exceed 30%. And the Americans figured that out. When they need to finance purchases, many consumers take advantage of cheaper credit, including refinancing their mortgages with payouts.

And many, many consumers only use their credit cards as payment and pay them off every month. This is shown by these relatively low balances.

The beautiful seasonal adjustments.

The seasonal adjustments to actual revolving credit dollar balances are designed to coincide with the peak month, December, each year. In other words, there are no seasonal adjustments for December, but there are for the other 11 months always adjusted upwards, as if every month were December during peak shopping season. And this creates the bizarre pattern that during 11 months of the year seasonal adjustments grossly overstate actual revolving balances.

In this chart, the green line represents the seasonally adjusted balances. Notice how it rides on all decs. The red line represents actual balances, not seasonally adjusted. And note the crazy split between the two lines over the last four months:

The consumer credit data the Federal Reserve released today was its limited monthly amount, just two incomplete summary categories of a complex phenomenon: “revolving credit,” which I discussed above, and “non-revolving credit,” which is made up of auto loans Student loans combined but not segregated, and mortgages, HELOCs, and other debt are not included.

The individual categories of auto loans, student loans, mortgages and HELOCs are only released quarterly from the New York Fed, and I reviewed them for Q1, covering each category, including mortgages and HELOCs, plus default rates for each category, plus third-party collections, foreclosures, and bankruptcies, as part of my quarterly review of consumer credit in America.

This quarterly data shows credit card balances individually, as well as other revolving consumer credit:

  • Credit card balances of $840 billion in Q1 were back to Q1 2008 levels and below Q1 2020 and Q1 2019 (red line).
  • Other consumer lending (personal loans, payday loans, etc.) was $450 billion, well below pre-financial crisis levels (green line):

In other words, revolving consumer credit remained about the same as it was 13 years ago, despite 13 years of population growth and 40% inflation. In real terms and per capita, it has become a sideshow.

Sure, some people overwhelm and fall behind. That always happens. But across the credit risk spectrum, that’s no longer a big issue. Consumers have gotten a lot smarter since the financial crisis. They borrow through much cheaper mortgage loans and auto loans, and proportionately much less at those rip-off rates that come with credit card and personal loans.

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