U.S. Consumer Credit Rises for the First Time in a Year

Americans' effort to pay down their personal debts unexpectedly halted in January as total U.S. consumer credit rose by 2.4% or by $4.96 billion to $2.46 trillion -- the first rise in a year, the U.S. Federal Reserve announced Friday.

A Bloomberg News economists survey had forecast consumer credit to fall $4 billion in January after a revised $4.6 billion decline in December. However, even with that single increase, for the 12 months since January 2009, total consumer debt has still fallen 3.9% to $2.46 trillion from $2.56 trillion.

In January, revolving debt, which includes most credit cards, fell $1.7 billion to $864.4 billion. Revolving debt totaled $955.4 billion in January 2009. However, non-revolving debt, which includes auto loans and personal loans, increased by $6.6 billion to $1.59 trillion; nonrevolving debt totaled $1.61 trillion in January 2009.

A perfect storm of factors coalesced during the recent recession, resulting in steadily declining consumer-credit balances. Stagnant incomes in many job segments, the loss of more than 8.4 million jobs from the workforce, and reduced credit lines and higher interests rates charged by banks and card issues have prompted Americans to reduce their credit balances over the past year.

An Upside Surprise -- for the Short Term

Most economists view the declining balances as a positive development, long-term. Americans overconsumed in the past decade, resulting in high and often unsustainable credit card and related debt balances. Short-term, however, "the great credit card pay down" will lower U.S. GDP growth, as it constrains consumer spending, which accounts for the bulk of U.S. GDP.

How should investors should interpret the January data? Without question, it was an upside surprise. The consensus had forecast another substantial decline. However, investors should keep in mind that it's only one month's data and debt balances could easily resume falling in subsequent months.

However, if the upward movement in credit use continues, it could be a further sign of a strengthening economic recovery, as credit use typically increases as Americans becoming more-confident about the nation's economic prospects.