Credit Noose Loosens

In an encouraging sign for the US economy, consumer credit availability actually expanded in January. Economists had expected consumer credit to contract yet again by $4.5 billion, but in reality credit was more plentiful to consumers by $5 billion or 2.4% annual rate of increase. The surprise growth in credit ends a streak of monthly declines that dates back to last February, and offers some evidence that consumers and financial institutions are gaining confidence in the economic recovery. Considering consumers are responsible for around 70% of economic activity in the US, any recovery in purchasing power is generally positive.

Revolving debt, such as credit cards, fell by $1.7 billion in January, according to the Fed’s statistics. Revolving credit has fallen 16 straight months, the longest series of declines since the Fed began keeping those records in 1968. The January drop was the smallest since July.

Non-revolving debt, including automobile and mobile-home loans, rose by $6.6 billion after a $4.9 billion gain. The Fed’s report doesn’t cover borrowing secured by real estate.

Auto sales in the U.S. cooled in January to a seasonally adjusted annual rate of 10.8 million, according to industry statistics. The pace slowed in February to 10.36 million.

Consumer spending during the final three months of last year rose at a 1.7 percent annual rate following an increase of 2.8 percent in the third quarter, Commerce Department figures showed on Feb. 26. Spending contributed to economic growth of 5.9 percent at annual rate, the best performance in more than six years. — 3/5/2010

Revolving debt continues to be sluggish, but overall credit did loosen in January for consumers. In combination with the improving February retail sales data from earlier this week, we regard this as a bullish development. We are always cautious not to make too much out of monthly data points, but this may mark a reversal in the vice grip on consumer credit availability. We would not be surprised to see continued normalization in consumer behavior over the coming months. Remember, comparisons to last year are going to be very easy going forward for the next quarter as the economy and consumers were reeling this time last year. We still believe job growth to be the most important factor for consumer confidence, but the other factors are starting to fall into line.

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