Consumer Credit Update: Green Shoots and Elephants

Earlier this week, the Federal Reserve released its preliminary report on consumer credit growth in April. This is an important indicator for the current and future path of consumer spending, which has long been the most significant component of U.S. gross domestic product (GDP): http://www.federalreserve.gov/releases/g19/Current/

The prior month’s preliminary report for March was interesting, as it showed a comparatively healthy bump in overall consumer credit, and the first increase in revolving credit since the financial crisis. However, the underlying data was not as encouraging—digging below the headlines, the only financial entity that showed any meaningful credit growth in March was the federal government (e.g., non-revolving student loans), and on a non-seasonally-adjusted basis, revolving credit growth was still negative.

The current report reaffirms that last month’s was nothing to write home about, as seasonally-adjusted revolving credit in March was revised down to a barely positive 0.1%. Moreover, the preliminary figure for April indicates that revolving credit contracted by 1.4% month-over-month (unadjusted), continuing the longstanding trend of household de-leveraging. It still seems plausible to us that 2010 tax payments were reflected in the March number, as an increasing number of taxpayers now use credit cards to settle up with Uncle Sam. True or not, the main implication is that households continue to rein in credit-driven consumption. While that’s a healthy development insofar as it reduces the fragility of private sector balance sheets, it’s something that premature fiscal consolidation at the federal level will work against (which still seems to be the preferred course of the American electorate, unfortunately).

There is a small green shoot in April’s preliminary data though—there was a noticeable bump in lending by commercial banks and credit unions, which credit markets have been foretelling for the last six to twelve months. Assuming this trend continues, it should be supportive of business investment, final demand, and ultimately, employment and incomes, despite the current soft patch. The elephants in the room continue to be (1) the U.S. government’s budget (if current budget negotiations lead us down the path of premature austerity, all of this will eventually be undone), (2) China’s economy and financial system (and an increasing number of other emerging economies), and (3) Europe’s fiscal challenges and fragile banking system. Any of those could easily trample this little green shoot and push the global economy back into recession.

Given their external financial obligations (a burden that the U.S. and eurozone economies do not have to deal with), it could well be that a hard landing in a key emerging economy or economies is what finally tips the world back into recession—especially given the likelihood of stagnant demand from Europe and other western regions, and the spectre of the U.S. Congress choosing to voluntarily default on Treasury obligations in August, as that would theoretically make U.S. dollars harder to come by (many argue that the USD would fall dramatically, but that assumes that there’s a credible short-term alternative out there; at this point there’s not).

Until one or more of those elephants (or something more unexpected) goes off the rails, we expect the U.S. recovery to continue. But it will remain subpar and will continue to disappoint in terms of both magnitude and duration, given the amount of private sector de-leveraging ahead of us, the global austerity fetish, emerging market tightening, and a fast-fading tailwind from global demographics in the coming years.

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