Soaring Revolving Credit May Not Indicate Strengthening Consumer Demand

The Federal Reserve Board reported that the total amount of consumer credit outstanding grew by a seasonally adjusted annual rate of 8.3% to $2.8 trillion in May, as debt associated with student and car loans, as well as credit card debt rose.

In April, consumer credit outstanding rose by 4.6%. The month-over-month increase in consumer credit outstanding reflected acceleration in the growth of both revolving and non-revolving credit. Revolving credit, which is largely composed of credit cards, rose by 9.3% in May after increasing by an upwardly revised rate of 1.1% in April. Meanwhile, non-revolving credit, which is largely composed of student and automobile loans, climbed 7.9%, 1.7 percentage points faster than April’s downwardly revised growth rate.

The May data represents the first time that the month-over-month rise in revolving credit has outpaced growth in non-revolving credit since May 2012.

The recent growth in revolving credit may not be confirming evidence of stronger consumer demand. On the one hand the increase in consumers’ use of credit cards may reflect growing confidence in the economic recovery. On the other hand, consumers may be increasing their use of revolving credit in order to offset lower disposable income due to factors such as higher payroll taxes.

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