Briefing.com: Consumer Credit

Updated: 05-Mar-10 15:30 ET

January Consumer Credit

Updated: 05-Mar-10 15:30 ET

Highlights

According to the Federal Reserve, consumer credit increased for the first time since January 2009.
Total credit increased by $5.0 bln, well above the consensus expectation of a $4.5 decline.
Revolving credit declined by $1.7 bln while nonrevolving credit increased by $6.6 bln.

Key Factors

It is still too early to say consumer demand has stabilized from one month of positive growth in consumer credit, but it is very encouraging to see consumers willing to take on more debt.
However, the data is a little misleading. Auto financing companies increased the interest rate levels for auto loans from 3.26% to 3.94%. The increase in credit may not be due to more expenditures but from car loans becoming more expensive. Unfortunately, the data is not detailed enough to determine where the credit increase is derived from.

Big Picture

Consumers and lenders have been intertwined in a vicious negative feedback loop regarding consumer credit. First, lenders became extremely worried about overleveraged consumers, and they pulled back available funds to even the most credit worthy borrower. Next, the consumer became aware of the tightened lending restrictions and increased their savings rate in an effort to pay off their debts. Lenders noticed a drop in demand for loans and became even wearier of the type of consumer looking for credit in today’s market. The loop continues as consumers push the savings rate even higher. Until lenders relax restrictions on lending, consumers will continue to demand less credit in the future.