Total consumer spending increased by $16.4 billion (B), in March well above the $15.0 billion consensus expectation. This was 6.1% increase year on year and encouraging news that consumers are confident and increasing their spending. Revolving credit increased by $1.96 B, +5.35% y/y while installment loans expanded by $14.47 B, +6.4%. The economy continues to gain strength, job creation is solid and household balance sheets are in the best shape they have been in decades.
Figure 1 shows consumer credit outstanding from 2006 to present. The blue line is revolving credit (credit cards) which is expensive money compared to installment loans, red line, (autos, furniture, etc.), generally financed over a period of years. Consumers have been much more careful with revolving credit since the great recession, the current level remains below the peak achieved in 2008. Figure 2 looks at the same data from 1980 to present on a stacked chart. The black line is the total of revolving and installment loans. On this long-term view, the great recession is barely a bump on the road.
Student loans and motor vehicle loans combined, made up 2.56 B or 22.5% of the notes issues in the first quarter of 2017. Student loans were 1.44 B +5.9% y/y and auto loans were 1.12 B, up 6.9% Q/Q. Both loan types’ y/y growth rates have been slowing. In the case of auto loans the downward slope began in Q2-2015. For student loans the downward trend began in 2010. The slowing rate of new auto loans is beginning to show up in the sales rate. Current data is indicating that 2016 will be likely be the peak year for auto sales this cycle, although the 2017 rate will still be in the 17 million range. More students are finding jobs in a strong job market and therefore are not requiring as much borrowing, (Figure 3).
We expect to see continued strong job creation and consumer spending in 2017. Debt payments as a percentage of disposable income are at record lows leaving room for consumers to take on additional debt.
At Gerdau, we monitor consumer spending because history has shown that increased consumer spending (approximately 70% of GDP), translates into increased steel consumption (and vice versa).