Consumer Credit Blipped Higher in April, but a Downtrend Remains

credit cards
credit cards

April's consumer credit report provides a case study concerning why investors shouldn't view the first estimate of an economic statistic as the definitive one. Consumer credit, as expected, rose by $1 billion in April. However, March's total was revised substantially -- to a $5.4 billion decline from the previously released $2 billion rise. This initial April number matched a Bloomberg survey of expectations.

The revision means consumer credit has risen only twice in the past 14 months -- in April and January of this year. In the past 12 months, total consumer debt has fallen 3.2% to $2.439 trillion from $2.521 trillion in April 2009.

In April, revolving debt, which includes most credit cards, fell $8.5 billion, or at an annualized rate of 12%, to $837.9 billion. Nonrevolving debt, which includes most auto loans, personal loans and student loans, increased $9.4 billion, or at annualized rate of 7.1%, to $1.602 trillion.

Lots of Question Marks

However, April's slight rise in total consumer credit did little to alter the long-term trend that points to a less-influential role for consumer spending in the U.S. economy. In the previous decade, consumer spending accounted for 65% to 70% of U.S. GDP, but that metric depended on rising median incomes, an ample supply of credit and a willingness to spend. Question marks surround each of these now.

Median incomes have fallen during the recession and were stagnant over the past decade, with household income totaling $50,303 in 2008, down from $51,295 in 1998 (in 2008 dollars), according to U.S. Census data. Credit is also tighter in the financial crisis era, with banks generally offering lower credit limits and substantially higher interest rates, even for adults with very good credit scorss.

Also, the "frugal consumer" trend -- budget conscious-Americans who save more, reduce discretionary purchases and continually look for ways to cut spending -- appears to have taken hold. One trip to a vacancy-riddled indoor mall or suburban shopping center will provide ample evidence of retail's more-modest times.

Can Exports Save the Day?

If that pattern persists, consumer spending will account a lower portion of U.S. GDP. If other commercial areas (such as business investment or exports) don't increase to fill the gap, U.S. GDP growth would likely be lower than during previous expansions.

After declining during the recession, business investment rebounded in late 2009 and early 2010. And exports have risen substantially -- up 21.5% to $147.9 billion since hitting a recession level low of $121.6 billion in April 2009. But questions remain about how hot exports can continue and how many domestic jobs the sector can create.

If exports and business investment can't fill the consumer spending void in GDP growth, that means the U.S. economy would have to restructure: Some other commercial activity would have to appear, and that's not likely to happen anytime too soon.