The Federal Reserve reported that total consumer credit outstanding increased for the seventh consecutive month, reaching nearly $2.43 trillion in April 2011—its highest level since February 2010. The gains in total consumer credit outstanding that started last October have been driven entirely by the non-revolving credit category, which is made up of auto and student loans.
Non-revolving credit climbed at an annualized rate of 5.4% in April and has been trending higher since last summer. Student loans are not suggestive of increased consumer spending, but rather a consequence of the weak labor market recovery–namely due to unemployed persons returning to school to improve their job prospects and current students postponing their entry into a weak job market. Along these same lines, the Federal Reserve’s Senior Loan Officer Survey also indicated that banks were loosening lending standards for consumer loans during 2011Q2, but auto loans were the only category to experience an increase in consumer demand.
Revolving credit lines, such as credit cards and home equity lines of credit (HELOCs) are a stronger indicator of borrowing for the purposes of funding household discretionary spending activity. So far, this has not pointed to any reduction in household deleveraging. This category registered a 1.4% annualized rate of decline in April and has fallen in 31 of the last 32 months. Compared to its peak, which was observed back in August 2008, this category has plunged 19% in nominal dollar terms—the largest decline on record for this data series.
Given weak labor market conditions, high fuel prices and concerns over the economy’s growth prospects, it is not surprising that consumers remain hesitant to take on new debt. A recent NAHB report drew connections between the personal savings rate, household balance sheets and more robust economic growth. According to the post, a decline in the savings rate to a more historically representative level of 3-4% could signal the point at which household credit conditions have improved enough to foster stronger growth in consumption and investment. As of April 2011, the personal savings rate stood at 4.9%. At this point, it appears households might have a little more balance sheet repair work to perform before they can access credit lines and ramp up spending.