Consumer credit rises at the slowest pace in three years
As lenders have tightened standards and more consumers have gone delinquent, that has added to the stress that causes demand to slow.
June 10, 2024
Consumer credit rose at a seasonally adjusted annual rate of 1.5% in April, less than expectations, after credit contracted in a downwardly-revised March. Total credit outstanding rose by $6.4 billion. The three-month moving average has now dipped to $5.7 billion, well under the 2010s average of $13.5 billion. Consumer credit outstanding rose 1.9% year-over-year, the slowest pace since March 2021.
Revolving debt, which is primarily made up of credit cards, fell 0.4% in April at an annualized rate. That is the first decline in outstanding credit card debt since April 2021, which immediately followed the third and final stimulus check that consumers used to pay down their debt and support spending. Contracting credit card debt is usually a negative signal; credit card debt outstanding tends to contract in recessions as lenders tighten up their standards. Much of the stress in credit cards is being felt among low-income and younger borrowers; they are maxing out their cards and going delinquent on payments. The good news is that rates on credit cards will be some of the first to turn over when the Federal Reserve begins to roll back restrictive policy later this year.
Nonrevolving debt, which includes car loans, student loans and personal loans, rose at an annual rate of 2.2% after falling 0.9% in March and coming in flat in February. Nonrevolving debt has not yet breached its all-time high reached in July 2023, when the Supreme Court decision on student loans prompted many to pay down some of their loan balances before the end of forbearance to hedge against restarting interest.
Much of the weakness in nonrevolving debt is from both credit access and prices. Lending institutions have tightened their standards, with the bulk of the loans going to borrowers with the highest credit scores according to the New York Federal Reserve Bank. That has priced many out of large loans for homes or cars. Higher rates have also kept many from purchasing vehicles, even as auto makers build up their inventories and reintroduced deals. The average rate on a new vehicle loan in the first quarter was 8.2% and 8.4% for a 60-month and a 72-month loan, respectively.
The series for consumer credit does not adjust for inflation; that masks some of the weakness for the consumer given the hotter inflation readings we have observed to start 2024. When adjusting for inflation, total consumer credit fell 0.2% in April and has fallen for five consecutive months. Revolving debt fell 0.3% in real terms, the second decline in a row, while nonrevolving debt fell 0.1%.
The Federal Reserve will still hold off on rate cuts until officials see substantial cooling in inflation.
Meagan Schoenberger, KPMG Senior Economist
Bottom Line
Consumer credit has cooled from its elevated pace of 2021 and 2022 and is now near contractionary territory. As lenders have tightened standards and more consumers have gone delinquent, that has added to the stress that is causing consumer credit, particularly in credit cards, to cool. While this stress has emerged, it has not leveled up into lower risk borrower categories. The Federal Reserve will still hold off on rate cuts until officials see substantial cooling in inflation. That will hamper utilization of credit until rates come down, especially on credit cards and vehicle loans.
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