Investors often look for the newest piece of information to get a leg up on the market, but that data is often already figured into market activity. Though it's a lagging economic indicator, the monthly consumer credit report from the Federal Reserve offers a big-picture view of the economic health of the country, allowing investors to operate under a better understanding of how the markets may move going forward.
Behind the times
Five weeks after each month's end, the Federal Reserve releases its consumer credit report, which provides some key statistics on trends for (non-real-estate) borrowing including credit cards, student loans, and auto loans. Because consumer spending accounts for nearly two-thirds of GDP consumption in the U.S., consumer credit use can be a major indicator of overall growth trends.
But because it is released weeks after the monthly consumer-confidence and retail-sales reports, analysts and investors may overlook some of the deeper revelations within the consumer credit report. Typically, analysis will stop at the headlines, with simple reporting on the total outstanding debt ($3.18 trillion in April 2014), the current growth rate of consumer debt (10.2%!), and credit card usage (up $8.8 billion for the month).
While headlines are great, they still focus on the past. Here are three key forward-looking trends you can interpret from the consumer credit report -- if you know where to look.
1. Impact of other macro indicators
Consumer credit use is exceptionally sensitive to consumer confidence and other economic indicators. With the release of April's data, investors can see how continued improvement in the jobs market, increasing homes values, and strong consumer sentiment toward the economy's recovery have affected spending habits.
The use of revolving credit, mainly credit cards and other unsecured loans, jumped by more than 12% during the month. This increase was the biggest since before the recession. What investors can interpret from the heavier use of credit cards is that personal income has increased enough to support a heavier debt load -- this is thanks to more employed consumers, higher home and stock values, and confidence in the future stability of the economy.
Viewing the monthly consumer credit reports will give you a better sense of how each economic factor affects consumer borrowing habits, providing a great gauge for how trends will develop.
2. Credit availability and lenders' sentiment
One of the biggest problems during the financial crisis and subsequent recession was a credit crunch, when very few banks or finance companies would lend money to borrowers.
Though it's not always the freshest data, the report includes average interest rates for various types of consumer credit accounts, including 48-month auto loans and credit cards. Through the interest rate trends over time periods, you can see how lenders are feeling about the creditworthiness of their borrowers.
Thanks to continued improvements in delinquency rates, the top credit card lenders including American Express (AXP 2.32%), Bank of America (BAC 2.55%), and Citigroup (C 4.47%) have been able to loosen crediting standards, reduce charged interest rates, all while maintaining steady levels of interest income for those accounts.
Credit Card Write-off Ratios | The Motley Fool | Data from Company 10-Q filings.
As borrowers pay down balances and reduce the frequency of delinquencies, banks and other lenders will often loosen qualification standards to offer credit more broadly. Over the past several months, most account types have experienced interest rate decreases, with auto loan rates falling 20 basis points since the end of 2013. This signals to investors that banks are feeling more confident in their borrowers' abilities to repay loans.
Since banks are often willing to loosen standards for auto, commercial, and business loans first, investors should feel confident that other loan types will follow suit in the coming months -- particularly the stringent standards for mortgages.
3. Benchmark rate flow-through
Last summer, the entire market hung on every word uttered by the Federal Reserve to glean what it could about the regulator's intentions for raising its benchmark Federal Funds interest rate. While there's still plenty of interest in the topic, investors have turned their focus to other items.
Benchmark rates do have an impact on consumers, though it's not as immediate as last year's panic seemed to imply. It can take anywhere from six months to a year for changes in benchmark rates (the Fed funds rate and prime rate) to flow through to the consumer level.
By monitoring the same rates that tell you how lenders are feeling about their customers, you can see how interest rates are moving in response to regulator activity.
If Chairwoman Janet Yellen and the rest of the Federal Reserve board members raise the benchmark rates, investors can anticipate the rise in consumer rates down the line. Alternately, if rates have been declining consistently (as shown in the recent data set) but abruptly jump, investors can look to changes in the benchmark rates to assess the situation.
Bigger than the numbers
Though it's not as timely as some other monthly reports, the Federal Reserve's consumer credit report offers deeper insight into trends that span the entire U.S. economy -- not just how much credit card debt the nation's consumers are using. Each month, look at the ongoing borrowing trends in order to better anticipate future market activity.
