Economics
June 7, 2022
Economic Indicator
Amid soaring prices, consumers reached for their credit cards in April, which lifted revolving credit above its pre-pandemic peak for the first time. While this is good in the sense that it points to strong demand despite high prices, it could be bad if it puts households behind the 8-ball in terms of staying current on their debt. A low debt service ratio says that is not yet the case.
The latest numbers on consumer credit from the Federal Reserve point to a major milestone: revolving credit (mostly credit card debt) has crested above its pre-pandemic peak for the first time. For total consumer credit the $38.1 billion gain in April marks a near-record increase, second only to that seen a month earlier in March. The data make clear that consumers are increasingly relying on debt to fund purchases.
Despite inflation outstripping income for the better part of the past year, the consumer continues to demonstrate uncanny staying power, as we highlighted in a recent report. We identified three main factors: a slower rate of saving, an increased use of credit, and the ability to tap a pile of accumulated savings. Today's consumer credit report highlights the second factor, the increased take-up of credit. While increased reliance on consumer credit cards is not a sustainable long-term driver of consumer spending, the available credit does help provide at least some short term relief during a time when gasoline prices are daily breaking all-time record highs. However, credit is more than just a symptom of pain at the pump, for many low- and middle-income consumers the accessibility of credit helps during those times when the paycheck is already stretched thin.
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| Source: Federal Reserve Board and Wells Fargo Economics |
The hope is that increased credit serves as a bridge until the Fed's efforts to rein in inflation are successful and real disposable income can return as the primary source of funds for spending.
So far, by most measures household borrowing remains far from a point of concern. As a share of disposable personal income, consumer credit still remains below its' pre-pandemic position at just around 25%. Further, many measures of consumers monthly or quarterly debt obligations as a share of income remain near record lows.
But increased reliance on balance sheets is not a sustainable source of purchasing power for consumers, and only becomes more challenging as the Fed hikes rates quite aggressively this year, which will drive borrowing costs higher. While credit can help bolster spending today, it can come at the expense of healthier household financials tomorrow. We'll get updated data on the broader financial health of households on Thursday in the Flow of Funds data for the first quarter of this year.
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| Source: Federal Reserve System and Wells Fargo Economics |
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Economics Group
Jay H. Bryson, Ph.D. | Chief Economist | 704-410-3274 | Jay.Bryson@wellsfargo.com |
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All estimates/forecasts are as of 6/7/2022 unless otherwise stated. 6/7/2022 15:52:41 EDT. This report is available on Bloomberg WFRE
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