On Monday, the Federal Reserve Board’s Consumer Credit Report revealed a 9.9 percent increase in the number of people using credit cards to finance purchases, in November 2011. Outstanding credit rose by $20.37 billion. This figure represents the largest increase in any month during the last ten years. It also raises the total outstanding consumer debt to $2.478 trillion.
The numbers tie in to the start of the Christmas shopping season – historically the best time of the year for retail sales. Over 72 percent of the increase or 14.8 percent consist of non-revolving credit, which points to the strength of car sales for the month of November. Resolving credit includes credit cards used by consumers.
In October, consumer credit increased $7.6 billion. September’s number climbed to $6.9 billion. Again, strong vehicle sales accounted for most non-revolving credit gains of $7.3 billion and $6.5 billion, respectively, for October and September.
Understanding the Consumer Credit Report
The Consumer Credit Report is a monthly release by the Federal Reserve Board, which provides an estimation of the changes in the dollar amount of consumer loans. Consumers use these funds mostly to buy automobiles. The figures do not include loans made to individuals for real estate such as home equity line of credit transactions.
The report has two components: revolving and non-revolving credit.
Revolving credit, which consists mainly of credit cards, allows consumers to spend up to a predetermined limit and does not require the vendor to call the creditor for approval. Non-revolving credit has fixed terms. It consists primarily of automobile loans.
The report furthered segregates the numbers according to commercial banks, finance companies, credit unions and savings institutions. Other categories include securitized asset pools, federal government/ Sallie Mae and non-financial businesses.
Other data contained in the report include the average interest rate for different consumer loan products, including vehicle loans, credit cards and bank loans. It also has information about collective credit quality of consumers and areas of high growth.
The Feds gather data by conducting a survey of banks, credit unions, finance companies and retail establishments. Each monthly report contains data from three previous months. It also contains revisions for any recent periods.
The Consumer Credit Report serves as an indicator for future spending in the economy. Changes in the Fed Funds Rate or Prime Rate may take up to 180 days before consumers realize the effects. Analysts and investors pay particular attention to consumer debt, credit card delinquencies and growth/decline rate.
The Consumer Credit Report release does not drive the market because of some other reports released ahead. It works like a “lagging indicator,” which provides useful information when used along with interest rates and personal wage growth indicators.
Conclusion
Most market watchers and economists look at rising credit as emblematic of consumers who have increased confidence in the economy. It can also mean people rely more on credit to purchase basic items, such as food or gasoline. Consumer credit has gone up 13 out of the last 14 months during a time when personal income has stagnated. Credit cards usage has fueled a portion of the sizable increase in consumption.
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