Consumer Credit Unexpectedly Rises in March

Americans' use of credit unexpectedly rose in March as total consumer debt increased by 1% or $1.95 billion, though revolving debt, the category that includes credit card use, declined, the U.S. Federal Reserve announced Friday.

Economists surveyed by Bloomberg News had forecast total consumer debt would fall by $3 billion in March after an $11.5 billion decline in February. Total consumer debt increased $10.6 billion in January.

In the past 12 months, total consumer debt has fallen 3.4% to $2.451 trillion from $2.536 trillion in March 2009. However, that's lower than the 4% year-over-year rate of decline recorded in February.

In March, revolving debt, which includes most credit cards, actually fell 3.7% or by $3.2 billion to $852.6 billion; revolving debt totaled $935.1 billion in March 2009. Non-revolving debt, which includes auto loans and personal loans, increased 3.3% or by $5.2 billion to $1.598 trillion; non-revolving debt totaled $1.601 trillion in March 2009.

A perfect storm of factors coalesced during the recent recession that resulted in steadily declining consumer debt figures. Stagnant incomes in many job segments, the loss of more than 8.6 million jobs from the workforce, reduced credit lines, and higher interests rates by banks/card issues have prompted Americans to shrink their credit balances.

Most economists view the declining balances as a positive development for the long term, because Americans over-consumed during the previous decade, resulting in high -- and in many cases unsustainable -- credit card balances. Short-term, however, "the great credit card pay-down" will hinder U.S. economic growth because it will constrain consumer spending, which accounts for the bulk of the nation's GDP.

March's report is a bittersweet signal for investors. On the one hand, the unexpected increase in credit use provides more evidence of a strengthening U.S. economy. That said, few economists want to see credit use expand unless it occurs in parallel with sustained job growth and increases in real median income. However, the economy added 290,000 jobs in April and appears to be on a job growth track. The best path for the economy would be a small, gradual increase in credit use -- an increase outpaced by real income gains.