The Latest Consumer Credit Report Revealed a Really Bearish Signal, Haven’t Seen This Discussed Much

by cbus20122

See FRED Revolving Credit Data Here

As some probably know by now, I’ve been following along closely to a lot of consumer credit data in the USA and also around the world. Today’s credit release had a really interesting and bearish item pop up…. a decrease in revolving credit, IE credit card debt.

This is interesting because at the outset, many would assume that a drop in credit card debt would be a good sign for the economy, but it turns out it has other potential implications for how people are viewing forward economic environment. Also, a drop in credit card debt means consumers are spending less, which leads to companies making less in revenue. In short, deleveraging tends to be more bearish than anything else, and this is a leverage indicator that rarely decreases.

Explaining the Chart

If you look in the FRED chart here linked at the top, I think it should be extremely self-explanatory. In short, revolving credit tends to only decrease during times of financial stress. This can be seen by the flattening or going negative of revolving credit.

The last 4 times this happened all occurred during recessions (the 2015 event was a data reset). It happened early in 2008, in 2001, in 1990, and in 1987.

  • Note that it’s not just about going negative. You’ll also notice that pre .com crash and pre GFC, there is a surge / high point in revolving credit before it drops down significantly. In 2001, there was a high point of just over 11 billion in revolving credit growth. This # was very similar in 2007. In december, we hit 12 billion in revolving credit growth before dropping down to now -3 billion.
  • Also do note that the spike in 2006 and the negative spike in 2015 are data items, not actual real drops or surges in revolving credit.

Things may be different?

Even though I’ve been notably un-optimistic about the future of the economy (6 months – 2 years out), this indicator is… a bit odd. The thing is, during other bear markets, it dropped below zero AFTER a recession already hit. Given, it dropped down a good bit before the big drops of 2008, but in the previous recessions, it hit zero pretty late on during the recession. At least to a degree, this seems to be more of a lagging indicator than a leading indicator. So why is revolving credit dropping so much, and is that a bad thing? This may be a sign that this isn’t a super reliable signal right now… or we could be in a similar situation to early 2008 for all we know. Hard to say anything definitive of course.

My biased 2 cents

Obviously, form your own judgements here and don’t use this in isolation to make any decisions. I think this is generally not a great sign. As I mentioned, a lot of consumer spending comes from revolving credit. If revolving credit is drawing down, then consumer spending is decreasing. It’s good to know that consumers are trying to reign in credit excesses, but the fact that there is a need to do so (if that’s the case) probably isn’t a great sign, especially given our rising rates.

In the 2008 example, when this crossed 0, we were about 15% off from all time highs. Currently, we are about 6% off all time highs. With that said, we should be aware that the environments are much different. We recently passed a stimulative package which made the current environment much different than 2008, so it’s natural that we aren’t down as much. We also are coming off an era of enormous liquidity and stimulus worldwide unlike 2008, so perhaps if it weren’t for these elements, we would be down more than we currently are when this indicator went negative. Who knows, it’s probably a moot point to compare eras like this, but I figured it’s at least worth exploring the one example where the indicator may have been more of a leading indicator than anything else.

Regardless, discuss.

878 views