How will consumption shape investments after the payrolls report?

Part 3
How will consumption shape investments after the payrolls report? (Part 3 of 12)

Will falling credit card debt affect stocks like Walgreens?

Consumer credit

Consumer credit figures for February will be released by the U.S. Federal Reserve on Monday, April 7. It’s a monthly release, and the headline number for the report is total consumer debt, which measures the total debt outstanding to individual consumers, mainly used to purchase consumer goods.

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What is the consumer credit report?

Consumer credit represents the dollar value of consumer installment credit outstanding and measures the level of indebtedness of private individuals. The report classifies the total debt outstanding as “revolving” (meaning it can be renewed without approval from the lender, like credit card debt) and “non-revolving” (like personal loans). This is re-categorized as dues to various institutions, such as commercial banks, finance companies, the federal government, or Sallie Mae.

Highlights from January’s consumer spending report

Consumer credit increased at a seasonally adjusted annual rate (or SAAR) of 5.25% or $13.7 billion in January.

Revolving credit decreased at a SAAR of 0.25%, or ~$0.2 billion, due to consumers paying off credit card debt after the holiday season.

Non-revolving credit increased at a SAAR of 7.25%, or ~$13.9 billion, driven mostly by the Federal government’s purchases of student loans.

The impact of consumer credit on current and future consumption

An increase in consumer debt has two implications. First, the economy benefits if consumers are borrowing within their means, as this will lead to an increase in consumer spending and the gross domestic product (or GDP). Second, lenders will be willing to advance loans under these circumstances.

An increase in consumption would benefit ETFs investing in the consumer discretionary sector like the State Street SPDR S&P Retail ETF (XRT), which tracks the S&P Retail Select Industry Index (an equal-weighted market cap index) that’s composed of the retail sub-industry portion of the S&P TMI. The top ten holdings in XRT include national retailer Walgreens (WAG), at 1.19%, and apparel company Abercrombie & Fitch (ANF), at 1.24%. WAG is part of the S&P 100 Index. The iShares S&P 100 ETF (OEF) is one ETF that tracks the S&P 100 Index.

The impact of consumer credit on interest rates

However, if the ratio of debt to personal income becomes unsustainable, this may impact future economic growth, as future income will be used to repay debt and not for future consumption. Also, the credit risk inherent in lending to over-stretched consumers would be higher, and lenders will raise rates, which will lower the prices of fixed income securities. One way investors can benefit from rising rates is to invest in inverse bond funds like the ProShares Short 20+ Year Treasury Fund (TBF) and the Barclays iPath US Treasury 10-Year Bear ETN (DTYS). Inverse bond ETFs provide the inverse return of the underlying benchmark index.

The consumer credit report is also important, as the Fed discloses the terms of credit for car and personal loans, which helps estimate the spreads consumers pay over and above the Fed funds rate.

To read about whether the impact of the recovery is affecting the nation’s smaller firms, read on to Part 4 of this series.

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