Thursday, May 10, 2012

It's the student loans, stupid - the March consumer credit increase has little to do with consumer "healing"

The mainstream media has once again completely missed the reasons behind the US consumer credit growth.
CNN/Fortune: - U.S. consumers had long been known for their love of credit until the financial crisis changed everything. Credit cards and loans were suddenly out of favor as credit markets tightened and millions saddled with debt lost their homes to foreclosure.

Now the latest data have some suggesting that those days are fading. In March, U.S. consumer credit expanded by 10.2% to $2.54 trillion – the fastest pace since late 2001, according to Federal Reserve data released Monday. What's more, February's expansion was revised up to $9.27 billion from an initial estimate of $8.73 billion.
They are referring to this increase in the overall consumer credit outstanding in March. It seems to indicate that the consumer is "re-leveraging".

Total US consumer credit outstanding (Fed/Bloomberg)

Many in the media have been pointing to increased credit card usage as the reason for this rise. But the trend in revolving credit (which is mostly credit cards) has not shown a great deal of growth.

Revolving consumer credit outstanding (Fed/Bloomberg)

Instead a much of the recent growth in consumer credit has come from the so-called nonrevolving credit.

Nonrevolving consumer credit outstanding (Fed/Bloomberg)

And here are the major components of this consumer credit category.

Source: FRB
1. Black: Nonrevolving consumer loans owned by commercial banks - these are mostly car loans
2. Purple: Nonrevolving consumer loans owned by finance companies - also car loans and leases
3. Red: Securitized consumer nonrevolving credit - this is mostly ABS.
4. And finally Green: Nonrevolving consumer loans owned by the federal government - student loans
CNN/Fortune: - The jump has surprised economists, who watch the data closely for a glimpse on the behavior of consumers. Their spending helps drive the economy, and so it's easy to think the surge in credit signals that consumers are healing.
So here is some news for the folks at CNN: the consumer is hardly "healing". And the jump should not be a surprise to economists. The spending increase is not on cars or refrigerators - the stuff that can have an immediate impact on the economy and jobs. This is spending for tuition and dorms. The investment in our youth and higher education is great. However the fact remains that these federal programs are putting the younger generations further into debt and creating a massive exposure (close to half a trillion) for the taxpayer. It also allows college tuition to rise unabated. Fannie Mae and Freddie Mac were great ideas as well - they certainly helped increase home ownership in the US. But in many cases when the federal government gets involved on this magnitude, things don't end well.
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