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What really happens to revolving consumer credit?

Beyond some of the uncertain things in the headlines today.

By Wolf Richter for WOLF STREET.

Revolving credit balances in April, seasonally adjusted – so the actual dollar balances – were $ 1.04 trillion, according to the Federal Reserve this afternoon. This includes credit card balances, personal loans, etc., and increased by only 2.6% from April 2019.

Let it sink in for a moment: Over a three-year period, revolving credit has grown by only 2.6%, despite 13% CPI inflation over these three years. In other words, growth in revolving credit has fallen sharply in inflation-adjusted terms.

The huge bottom between 201[ads1]9 and today stems from the pandemic when consumers used their incentive money to pay down credit cards, and when they cut spending on discretionary services, such as sports and entertainment events, international travel or optional health services such as cosmetic surgery, dental visits, etc. of this period, the delays fell to record lows.

What really happens to revolving consumer credit?

Rotating credit balances are barely above the peaks in 2007 and 2008, despite 14 years of population growth and 40% CPI inflation over these years! In other words, revolving credit is just not the type of issue it was in 2008. It’s a sideshow.

In terms of growth – in the form of extra borrowed money spent on the economy – it was minimal. In fact, there has been no growth since December. And after the repayments in January and February, after the annual Christmas trade, the total balance grew by only $ 14 billion in March and by $ 17 billion in April, a total of $ 31 billion.

This $ 31 billion growth in March and April did not even offset the $ 32 billion repayments in January and February. These are actual dollars, not seasonally adjusted theoretical dollars.

When it comes to boosting economic growth: Total spending is currently running at an annual rate of $ 17 trillion, with a T. So how much growth will the overhead from the rise in revolving credit increase? It was a rhetorical question. It is minimal.

Since 2019, consumption has increased by 19%, and revolving credit has only increased by 2.9%, both not adjusted for 13% inflation over the period. In other words, growth in revolving credit fell sharply behind inflation and fell massively behind growth in consumption.

This shows that consumers are less dependent on revolving credit.

Credit cards and certain types of personal loans, such as payday loans, are the most expensive form of credit, and they often come with usury. Credit card prices can exceed 30%. And the Americans have figured this out. If they need to finance purchases, many consumers use cheaper loans, including repayment refinancing of their mortgages.

And many, many consumers use their credit cards only as payment methods, and they pay them down every month. This is what these relatively low balances show.

The beautiful seasonal adjustments.

The seasonal adjustments to the actual revolving credit-dollar balances are designed to match the peak month each year, namely December. In other words, there are no seasonal adjustments for December, but the other 11 months are always adjusted upwards, as if each month was a December during the holiday shopping binge. And this creates the bizarre pattern where the seasonal adjustments during 11 months of the year grossly overestimate the actual revolving credit balances.

In this chart, the green line represents the seasonally adjusted balances. Notice how it rides on top of all the December. The red line represents the actual balances, not seasonally adjusted. And notice the insane disconnect between the two lines over the last four months:

The consumer credit data released by the Federal Reserve today was its limited monthly set, just two incomplete summary categories of a complex phenomenon: “revolving credit”, as I discussed above, and “non-revolving credit”, which is composed of car loans and student loans. combined, but not separated, and it does not include mortgages, HELOCs and other debt.

The individual categories car loans, student loans, mortgages and HELOCs are only released quarterly of the New York Fed, and I discussed them for the 1st quarter, covering all categories, including mortgages and HELOCs, plus default rates for each category, plus third-party collection, forced sales, and bankruptcies, as part of my quarterly consumer credit review in America .

These quarterly data show the credit card balances for themselves, plus other revolving consumer loans:

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

In other words, revolving consumer credit was roughly flat 13 years ago, despite 13 years of population growth and 40% inflation. In reality, per capita, it has become a side show.

Sure, some people are over their heads and they will fall behind. It always happens. But in the overall credit risk spectrum, this is just not a big issue anymore. Consumers have become much smarter since the financial crisis. They borrow through much cheaper mortgages and car loans, and proportionally much less at these rip-off rates that come with credit cards and personal loans.

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