Record Low Rates Spur Consumer Debt, But Not Spending

The Mortgage Corner

Consumer credit rose a very large $17.2 billion in February with January revised higher to $14.9 billion, says the Federal Reserve. Nonrevolving credit, which are gains for vehicle financing and student loans, rose $14.2 billion and revolving credit, where credit-cards are tracked, rising the smallest amount as usual with a gain of $2.9 billion. Total consumer borrowing, which does not include mortgage debt, is now $3.57 trillion.


Graph: Econoday

This seems to contradict recent weak retail and consumer spending data that shows consumers saving more and spending less. So what are consumers up to? The lack of gains for revolving credit is good in the sense that it points to consumer wherewithal but negative relative to short-term consumer spending, says Econoday.

The Commerce Department reported consumer spending has been tepid the past 2 months. Income rose a soft 0.2 percent in February with wages & salaries slipping 0.1 percent for the first decline since September and, as it turned out, underscoring the lack of earnings punch in the employment report. But the worst news comes from the spending part of the report, up only 0.1 percent and with January revised sharply lower, now also at 0.1 percent vs an initial jump of 0.5 percent.


Graph: Econoday

And consumers continue to put money in the bank as the savings rate, in perhaps a sign of consumer defensiveness, is up 1 tenth to 5.4 percent for a 3-year high. This is while year-over-year income growth is near a two-year low and spending well under the growth during 2014. This softness isn’t helping vehicle sales which in an ominous sign for the March retail sales report (released next week) fell 5.1 percent in data released on Friday. The annualized unit rate of 16.6 million is the lowest since February last year.

So what is the problem, with jobless claims at record lows, pointing to a lack of layoffs and ongoing strength for the nation’s labor market? Initial claims fell 9,000 in the April 2 week to a slightly lower-than-expected 267,000. Consumers continue to pile up debt, but are spending less on day-to-day needs paid with credit cards.

Could it be due to plunging stocks and geopolitical uncertainty, synonymous with the recent terrorist attacks and weak growth in other major economies, like the EU and China?

We have no real answer, but continue to hope real estate will somehow fill the growth gap, with record low interest rates, and the Fed showing no signs of raising interest rates further. Purchase applications for home mortgages declined by 2.0 percent in the April 1 week, but refinancing, boosted by lower rates, increased by 7 percent. The average rate for 30-year conforming loans ($417,000 or less) dropped by 8 basis points from the prior week to 3.86 percent. (But conforming fixed mortgage rates are now as low as 3.25 percent in California for 1 origination point.)

Year-on-year, the purchase index was up 11 percent, still strong but a far cry from early March levels when it was more than 30 percent higher than year ago levels. But last week’s construction spending report for February showed spending for new single-family homes rose 1.2 percent month-to-month and multi-family homes 0.9 percent. And, the 11 percent year-to-year rise in the purchase index is in line with February’s year-to-year 10.7 percent increase in residential construction spending, and these are still quite impressive.

So when and how will we know what consumers are really up to, more savings or more spending? Probably not until the spring housing season kicks in sometime in May. We should also have a better picture of 2016 GDP growth by then.

Harlan Green © 2016

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About populareconomicsblog

Harlan Green is editor/publisher of, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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