Credit The Consumer


Consumer debt is gaining steam. Consumer credit grew by $62 billion in the second quarter of this year (seasonally adjusted), the most in three-and-a-half years. Most of the increase was in non-revolving credit ($50 billion) while revolving debt rose by $12 billion. In addition, automobile loans increased $25 billion (not seasonally adjusted), the most since the third quarter of 2013, and student loans grew by $13 billion. In June alone, consumer credit rose by $17 billion from May.


The recent run up in credit debt over the past few years, however, is not worrisome because consumers’ debt service (CDS) ratios remain low, as indicated by the chart below. (It should be noted that the two large quarterly spikes in consumer credit occurring in 2006 and 2010 were due to sample changes in the Federal Reserve’s survey.) The CDS ratio measures the total quarterly scheduled consumer debt payments (excluding mortgage payments) relative to disposable personal income. It peaked in the fourth quarter of 2001 at 6.7% and is currently hovering around 5% which is the lowest since 1994.  Part of the decline was due to bank depository charge-offs of consumer debt which peaked in mid-2010 at a rate of 6.7% of consumer credit outstanding and has fallen to 2.0% in the first quarter of this year. Other factors affecting the decline in the CDS ratio include tighter credit standards from lenders, households better managing their balance sheet, and disposable personal income mostly increasing (on an annual basis) over the years.

June Credit

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