Consumer Credit: Good News, But Just One Data Point

by Ken Paterson 0

After declining continuously for about twoyears, the recent uptick in consumer revolving credit outstanding(the Federal Reserve’s monthly G19 statistic) is being hailed asthe long awaited turnaround in consumers’ willingness to borrow oncards. Other indicators are beginning to turn around as well, suchas increased credit card spending reported by Visa and MasterCardfor Q4 2010. The decline in bank credit card accounts on file alsoappears to be stabilizing.

But as we all know, it’s a bit risky to draw a trend line based ontwo data points (in this case, November and December). We should becautious about this particular indicator for a number ofreasons:

• The modest uptick in consumer revolving credit for December(+3.5%, or $2.5 billion) is roughly in line with the increase inconsumer spending over the holidays, and could be driven by spendalone.
• The number is preliminary, potentially to be revised nextmonth.
• The Fed’s G19 statistic includes all estimated credit cardoutstandings at the end of the month as well as balances thatconsumers will choose to pay off immediately, rather than revolve.We estimate that typically 10-15% of the monthly balances includedin this statistic represent balances that will not stick beyond oneaccount cycle and incur finance charges. It is too soon (by atleast a month) to declare that consumers have overcome theirhesitance to borrow.

Sorry to throw a wet blanket on the party. We do appear to besomewhere near the bottom of the long decline in credit cardborrowing. But let’s aspire to perhaps four data points (December,January, February, March) before we declare a change in the trend’sdirection. And the slope of the presumed upturn will be critical aswell to issuers, as they target consumers who may be still cautiousabout taking on debt. Our consumer survey data suggests thatcaution abounds among current and former credit cardholders stillfocused on repairing their households’ finances.

It’s much like those mounds of snow outside Mercator’s offices.Every time the temperature budges above freezing, we see the end ofwinter (only to receive another foot or so of the whitestuff!).

Spring will come-on its own schedule.