Consumer Credit May Weigh on Economy

Evidence is mounting that consumer lenders are slowing their credit card, auto and other loans

By Aaron Back

Consumers drive the U.S. economy and if they moderate their spending, overall economic growth could be lower than expected.
Consumers drive the U.S. economy and if they moderate their spending, overall economic growth could be lower than expected. Photo: Erica Yoon/Associated Press 


Weak consumer lending risks becoming a headwind for an otherwise healthy economy.

Evidence is mounting that consumer lenders are slowing their credit card, auto and other loans.

Monthly data from the Federal Reserve shows that total consumer loans outstanding rose at a seasonally adjusted annualized pace of just 3.3% in February, down from 4.9% in January and 6.0% in December.


For all of 2017, consumer loan growth already slowed, dropping to 5.4% from 6.8% the prior year, according to the Fed data.


CREDIT DOWNGRADE
Change in total revolving consumer credit, seasonally adjusted annual rate:

Source: Federal Reserve



Revolving consumer credit lines, primarily credit cards, have slowed even more sharply. Total outstanding revolving credit was up a seasonally adjusted, annualized 0.2% in February. That is the lowest monthly reading since revolving credit fell in November 2013.

There are two explanations. First, lenders have grown more cautious over the past year in response to rising delinquencies and defaults on their loans. The Fed’s survey of senior loan officers shows more bankers tightening terms on consumer loans than not in four of the last five quarters.

Shares of consumer lenders have underperformed lately, reflecting concerns over slower loan growth and credit issues. A group of five major card issuers fell an average 9% in the first quarter while two major auto lenders fell 10%, analysts at Keefe, Bruyette and Woods pointed out in a recent note. That compares with a 1% decline in the S&P 500 over the same period.

Second, consumers may now be paying down loans that they accumulated over the past few years of strong credit growth. This effectively means that consumers are saving more.

It also means that modestly rising wages and lower taxes won’t spur consumer spending as strongly as investors appeared to believe last year. Consumers drive the U.S. economy and if they moderate their spending, overall economic growth could be lower than expected this year.

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