Revolving and non-revolving credit growth rates in US to converge going forward

Consumer credit in the US rises again in February. It increased by USD 17.2 billion, more than expectations. Also, January’s increase was revised upwards to a rise of USD 14.9 billion. Non-revolving credit rose moderately by USD 14.3 billion, whereas revolving credit rose USD 2.9 billion month-on-month. On an annual basis, non-revolving credit grew 6.9%, continuing to surpass revolving credit that rose 5.7% y/y.

Non-revolving credit seems likely to decelerate as student loans and auto loans’ growth rates ease further, according to Wells Fargo. So far, auto sales have declined in Q1; hence a flat reading for auto lending will not be surpassing, added Wells Fargo. Meanwhile, non-revolving credit has grown strongly in January and February of 2016, suggesting a likely growth in student lending in Q1, noted Wells Fargo.

Consumer expectations are supportive of the prospect for increased dependence on revolving credit in the future, said Wells Fargo. According to the New York Fed’s Survey of Consumer Expectations, spending growth expectations over the next year have surpassed that for income growth. This difference widened in February as spending growth expectation increased to 4%, whereas income growth expectation increased to 2.5%.

If these expectations come true, it will suggest that consumers will have to fund the additional consumption by additional borrowing or liquidating assets or cutting their saving rate, according to Wells Fargo. A separate New York Fed Survey, the Survey of Credit Access, gives information on attitudes of consumers towards several credit forms. According to the latest release, expected applications for credit cards are rising, which is another sign of support for revolving credit. However, these surveys are new and have quite a short time series that makes it quite challenging to come to many conclusions from short-term fluctuations, added Wells Fargo.

There are definitely some headwinds, in spite of some tailwinds.  Revising personal consumption negatively shows that consumer might not increase spending as quickly as was anticipated initially, noted Fells Fargo. Moreover, the rate of savings has increase recently, suggesting that consumers might have additional bandwidth to fund consumption with current income rather via credit cards.

“These headwinds have tempered our outlook for revolving credit modestly, although we still look for the growth rates between revolving and non-revolving credit to converge moving forward”, says Wells Fargo.