Important releases hone in on rates and consumer spending

Part 4
Important releases hone in on rates and consumer spending (Part 4 of 10)

Why May’s consumer credit report is key in more than 1 way

The U.S. Federal Reserve Consumer Credit release for May

The Fed will release the consumer credit figures on Tuesday, July 8. This is a monthly release. Its headline number is total consumer debt.

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What is the consumer credit report?

Consumer credit represents the dollar value of consumer installment credit outstanding. It measures the debt level of private individuals.

The report classifies the total debt outstanding as “revolving” and “non-revolving.” Revolving debt is renewable without approval from the lender—like credit card debt. Non-revolving debt, on the other hand, is things like student loans and car loans. The report further categorizes debt as dues to various institutions, such as commercial banks, finance companies, the federal government, or Sallie Mae.

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

Takeaways from April’s consumer spending report

  • Consumer credit increased by a very large $26.8 billion in April 2014 at a seasonally adjusted annual rate, or SAAR. This represented one of the largest gains on record.
  • Both revolving and non-revolving components rose. They grew by $8.8 billion and $18.0 billion, respectively.
  • The gain for revolving credit was particularly significant, as consumers in recent months have been more interested in paring down credit card dues.
  • The main drivers of non-revolving credit were the acquisition of student loans by the Federal government and financing for car purchases.

The impact of consumer credit on financial markets

The consumer credit report has major implications for debt markets—both on the demand and supply sides. An increase in consumer credit implies an increase in consumption. This positively affects the GDP and economic growth, benefiting stocks (MDY)—all else being equal. Particularly, consumer discretionary stocks (XRT) would benefit from an increase in consumer spending. This would increase yields on bonds (BOND) and result in falling bond prices—all else being equal.

On the other hand, the report also shows you credit worthiness. If the debt–to–personal income ratio becomes unsustainably high, it results in credit card providers like American Express (AXP) and Citigroup (C) raising the interest rates they charge on revolving credit card debt. This, in turn, would impact future credit purchases, leading to a decline in credit. So you need to carefully interpret the report.

JOLTS

In the next part of this series, we’ll preview the Job Openings and Labor Turnover Survey, or JOLTS, that will also come out on Tuesday, July 8.

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