What is really happening with consumer revolving credit?

Plus some of the dubious stuff in today’s headlines.

By Wolf Richter for WOLF STREET.

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

Let yourself be absorbed for a moment: in a three-year period, revolving credit grew by only 2.6%, despite the 13% CPI inflation in those three years. That is, revolving credit growth dropped sharply in inflation-adjusted terms.

The big valley between 2019 and today stems from the pandemic, when consumers used their stimulus money to pay off credit cards and when they cut spending on discretionary services like sporting and entertainment events, international travel or elective health services like plastic surgery. , visits to the dentist, etc. In this period, defaults dropped to record levels.

Revolving credit balances are just above their 2007 and 2008 peaks, despite 14 years of population growth and 40% CPI inflation over those years! In other words, revolving credit is simply not the kind of problem it was in 2008. It’s a spectacle on its own.

In terms of growth – in terms of additional borrowed money spent in the economy – it was minuscule. In fact, there has been no growth since December. And after payments in January and February, after the annual holiday shopping spree, total balances grew by just $14 billion in March and $17 billion in April to $31 billion.

That $31 billion growth in March and April didn’t even offset the $32 billion in payments in January and February. These are actual dollars, not seasonally adjusted theoretical dollars.

In terms of increasing 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 has increased by 19% and revolving credit has increased by just 2.9%, both unadjusted for inflation of 13% in the period. In other words, revolving credit growth was far below inflation and far below consumer spending growth.

This shows that consumers are relying less on revolving credit.

Credit cards and some types of personal loans, such as payroll loans, are the most expensive form of credit and often come with usurious interest rates. Credit card fees can exceed 30%. And the Americans discovered it. If they need to finance purchases, many consumers use cheaper loans, including refinancing their mortgages.

And many, many consumers are using their credit cards only as payment methods, and they pay them every month. That’s what these relatively low balances show.

The beautiful seasonal adjustments.

Seasonal adjustments to actual dollar revolving credit balances are designed to coincide with the peak month of each year, ie December. That is, there are no seasonal adjustments for December, but the other 11 months are always set up, as if each month was a December during the peak of holiday shopping. And this creates the bizarre pattern where, for 11 months of the year, seasonal adjustments grossly overstate actual revolving credit balances.

In this graph, the green line represents seasonally adjusted balances. Watch how he rides on top of every December. The red line represents actual, non-seasonally adjusted balances. And look at the crazy disconnect between the two lines over the last four months:

The consumer credit data the Federal Reserve released today was its limited monthly set, just two incompletely summarized categories of a complex phenomenon: “revolving credit,” which I discussed above, and “non-revolving credit,” which is made up of loans for combined but not separate auto and student loans, and do not include mortgages, HELOCs, and other debt.

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

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

  • Credit card balances at $840 billion in Q1 were back where they were in Q1 2008 and below Q1 2020 and Q1 2019 (red line).
  • Other consumer loans (personal loans, payroll loans, etc.) at $450 billion were below levels well before the financial crisis (green line):

In other words, consumer revolving credit was virtually flat 13 years ago, despite 13 years of population growth and 40% inflation. In real terms and per capita, it has become a spectacle on its own.

Of course, some people are in over their heads, and they will be left behind. That always happens. But on the overall spectrum of credit risk, this is simply not a big deal anymore. Consumers have gotten a lot smarter since the financial crisis. They are borrowing through mortgage loans and car loans much cheaper and proportionately much less with those theft fees that come with credit card and personal loans.

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