Looking at economic data is more than just performing statistical analysis of cold, hard numbers. Since so many people are reluctant to share details about their financial lives, using economic data is often the best way to learn more about how others manage their money. By looking through releases of various sets of information, you can also draw broad conclusions about the economy.
One report with significant ramifications for the ability of consumers to sustain current spending levels is the Federal Reserve's monthly report on consumer credit. In its role as central bank for the U.S. banking system, the Fed gathers information from financial institutions across the country and presents some enlightening results. As with other economic data, you can use this report to your advantage.
The basic concept
In the consumer-credit report, the Federal Reserve collects data on the amount of credit that has been extended in non-commercial transactions. The Fed first presents the overall numbers and then analyzes the figures in two ways. First, it breaks down credit by the type of financial institution that provides the money for the loan. Those institutions include commercial banks, finance companies, credit unions, savings institutions, nonfinancial businesses, asset pools for which public securities are issued, and the federal government and SLM
Second, the Fed divides consumer credit into two categories based on the nature of the borrowing arrangement to the consumer: revolving debt, which is debt that lending institutions generally make available to consumers on an ongoing basis without any fixed requirements for full repayment; and nonrevolving debt, which includes all other loans and generally includes loans that have fixed terms for repayment.
An example of revolving debt is a credit card; although you have to make minimum payments, you can generally borrow any amount up to your credit limit at any time without specifically notifying the card issuer of your intentions. An example of nonrevolving debt is a traditional fixed mortgage, in which your loan is for a specific term and your monthly payments are precisely calculated to pay off your loan at exactly the time the loan's term ends.
In addition to presenting information on debt levels, the report also includes the rates charged on certain types of loans, including new-car loans, unsecured personal loans, and credit-card accounts. Some supplemental information on car loans, such as average maturity, interest rate, and average amounts borrowed, is also included in the report.
Unlike some other agencies and organizations that gather data, the Federal Reserve's website does not include a great deal of detail about how the data is collected. The method of presentation is compact and straightforward, without embellishment or unnecessary detail.
The consumer-credit report contains some very interesting information. At the highest level, the expansion of consumer credit that involved high rates of growth in 2000 and 2001 continues, but at a much slower pace. Consumer credit expanded at a rate of 4% in 2005, and the numbers are on track for a similar rate of growth this year. In general, nonrevolving credit has expanded at a faster pace than revolving debt, although numbers in recent months have indicated at least a temporary reversal of this trend.
The two major sources funding consumer credit are commercial banks and investors who purchase securities representing pools of assets that act as collateral for loans. Almost two-thirds of all lending comes from one of these two sources. As growth in lending from commercial banks has stalled out over the past several years, most of the increase in liquidity has come from an increasing use of securitized asset pools.
At this point, while it's likely premature to conclude that borrowers from commercial banks are facing a credit crunch, it is nevertheless interesting to see bank borrowing growth essentially disappear. As long as investors are willing to buy asset-based fixed-income securities, borrowers should have enough liquidity to keep their debt levels at present levels. However, part of the Federal Reserve's purpose in raising short-term interest rates is to slow down the economy, and removing liquidity from the financial system is a very effective way to reduce economic activity and investment.
The numbers dealing with typical consumer-debt arrangements are also noteworthy. The average new-car loan from an auto-finance company carries a rate of 5.25%, with an average maturity of 62 months and a typical amount of more than $25,000. In contrast, new-car loans from banks average almost 8%. In addition, looking at credit card rates, we see the average rate now exceeds 13%. For cardholders who actually pay finance charges, the rate is almost 15%. This goes to show that while many savers have looked forward to higher interest rates, many consumers will suffer from the increased borrowing rates that come with the Fed's rate hikes.
In summary, the Federal Reserve's consumer credit report, while perhaps not the most user-friendly release of economic data, provides some useful information about the borrowing practices of typical consumers. By seeing the way consumers behave and the impact on their finances, you can be more aware of your own personal credit management and take steps to avoid the traps into which many borrowers fall.
For more credit-related information, be sure to visit our Credit Center.
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