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For all the news out of the Federal Reserve over the past week, it was easy to miss the latest consumer credit report released by the central bank late last week. It’s worth considering what the data suggest.
Consumer credit surged $41.8 billion in February, a record high that Wall Street didn’t see coming. Economists polled by FactSet predicted a $17.5 billion rise, up from $8.9 billion a month earlier. A big chunk of the increase in Thursday’s report was in nonrevolving credit—typically student loans and auto loans, notes Ed Yardeni, president of Yardeni Research. He says the increase in the former can be primarily attributed to the unusual timing of student-loan borrowing this year, possibly a result of government pandemic-relief policies. The 41% jump in used car prices and a 12% increase in new car prices from a year earlier, meanwhile, are forcing consumers to borrow more money to buy them, Yardeni says.
That’s roughly half the story. The rest of the jump in consumer credit, some $18 billion, was in revolving credit. Credit cards are the most common form of revolving credit. The report from the Fed doesn’t detail expenditure categories like many other government reports do. But it seems reasonable to connect a few dots.
First, it is probably no coincidence that the costs of basics are quickly rising. The consumer credit data are dated, given that it’s already April and because the prices of food and energy lurched higher after Russia invaded Ukraine at the end of February. The region accounts for a large amount of the world’s wheat, oil, fertilizer and other food-and-energy commodity exports. The point is that the prices of essentials were already high and rising into the war, despite broad calls across Wall Street for inflation to peak soon.
Price inflation for basics will likely get worse before it gets better. That is to say nothing of rent prices, which follow home prices by 12-18 months and are soaring across the country. A report from the New York Fed on Monday showed consumer inflation expectations jumped off the chart, Yardeni notes. Respondents see prices rising 6.6% over the next 12 months, a record high for the series.
The rise in credit thus appears to be a big, under-the-radar flag for broader economic growth. Consumers make up about two-thirds of gross domestic product, and the cost of credit is only rising just as the prices of basics are flying. After lifting rates by 0.25% in March, the Fed is probably going to raise interest rates by a half-percentage point early next month. The central bank may hike by that much again in June, right around the time it starts shrinking its massive balance sheet. Traders are pricing in a policy rate of close to 3% by the end of this year. No one really knows how the balance-sheet tightening will play out.
Second, such a surge in consumer credit throws cold water on the idea that a big consumer savings pile, the result of reduced economic activity during the pandemic and fiscal and monetary stimulus, will cushion the U.S. economy from a recession as the Fed embarks on what amounts to double tightening. As Joe LaVorgna, chief economist for the Americas at Natixis, recently told us, the roughly $3 trillion consumers amassed over the past two years could be gone within months if increases in food and energy prices persist.
There might be a positive way to spin at the jump in consumer credit. As Yardeni says, it makes it harder to worry about consumer spending. People were clearly spending in February. Again, though, the data are dated and the possibility that consumers are charging food and gas just as the cost of credit rises hardly seems like a positive.
Write to Lisa Beilfuss at lisa.beilfuss@barrons.com
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