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Tuesday, July 23, 2024

Shocking Drop In Auto Loans Results In Weakest Consumer Credit Print Since 2020

Last month, when both revolving credit (i.e., credit card debt) and interest charged on credit cards hit a record high, we said that this trajectory was unsustainable and it was only a matter of time before the debt-funded US consumer hit a brick wall. One month later, the brick wall is finally here, because according to the Fed’s just released consumer credit report, in May US consumer credit grew by a paltry $7.24BN, down more than 50% from the downward revised $20.3BN in April

…. and a huge miss to the consensus forecast of $20 billion. In fact, this was the 4th miss in the past 6 months.

This was the lowest monthly increase in consumer credit since Nov 2020, and for an economy that – like the US – is entirely reliant on constant credit growth, a semi-stagnant print such as this one is tantamount to contraction.

However, while one may think that after several months of near-record increases in revolving credit we would finally see a drop in this series, that was not the case; in fact, in May revolving credit rose by a respectable $8.5 billion.

The shocker was in the non-revolving segment, also known as student and auto loans, and which unexpectedly dropped by $1.3 billion. This is a shocker because while the monthly change in revolving credit can fluctuate significantly month to month, the non-revolving credit increase has historically been a consistent $10+ billion. Only in the past 6 months, that has not been the case, and as shown below, we have seen a sharp drop in in the monthly increase in non-revolving credit, which after 5 months of drops finally printed negative to the tune of -$1.26 billion, the first negative print since April 2020!

While we don’t know whether this decline was driven by a reversal in student or auto loans – the Fed publishes that data quarterly and the next month we will get the Q2 update – it is safe to assume that at a time when student loans are still in forbearance if only for a few more weeks, and nobody has any qualms about taking out more debt they don’t have to repay, the driver behind the slowdown is auto loans, which is hardly a shock with the rate on new 60 month car loans approaching the highest on record at 7.81%, just a fair below the all time high of 7.82% hit in Q3 2006.

And with non-revolving credit now shrinking, the final straw will be the reversal in (record) credit card debt. With credit card interest rates also at a record 22.16%…

… we won’t have long to wait.

This post was originally published on this site

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