Is The Consumer Coming Back?

By Greg Sushinsky | September 14, 2011 AAA

Consumers stepped up their borrowing in July, registering the largest increase in three years. Borrowing was led by student loans and auto loans, while at the same time, credit card borrowing for July had its biggest drop in six months.

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Consumer Borrowing Mixed
Total borrowing increased $12 billion in July following the $11.3 billion increase in June. Consumers presented a mixed picture of borrowing activity for mid-summer, though, as non-revolving debt increased $15.4 billion in July, while on the other hand, revolving debt dipped $3.4 billion. Non-revolving credit was attributed to auto finance loans and student loans, while revolving debt is largely credit cards. The mid-summer increase in auto sales helped drive overall borrowing, as autos sold at an annualized pace of 12.2 million, which was a rebound from the softer 11.4 million annualized pace of sales recorded in June.

Educational Loans and Scholarships Cut By States
One factor affecting the increase in consumer loans may be that educational loans and scholarships have been cut back by states. The thought is also that consumers are sticking with more responsible spending, as credit card borrowing declined.

Revolving credit dropped to $792.5 billion in July, reversing the trend following increases in both May and June. Credit card borrowing had increased throughout the recession, from September 2008 through November 2010. Although one month certainly doesn't make for a trend, it is something no doubt that credit card lenders such as Bank of America (NYSE:BAC), Capital One (NYSE:COF) and Discover Financial Services (NYSE:DFS) are noting, as well as card processors Visa (NYSE:V) and Mastercard (NYSE:MA). The July decline would be annualized at 5.2%, which is larger than the increases in either May or June.

Borrowing and Buying
The report on July consumer borrowing came in shortly after the initial August retail report, which detailed that consumers had pushed up retail sales 4.6%. A theme could be connected in the shopping and the borrowing, as the August retailing included most of the back-to-school drive. Consumers may have been holding back on non-necessities to concentrate on school supplies for their children, and in some regions of the country, on hurricane or tropical storm-related purchases.

The consumer has been faced with a battery of challenges, especially vivid since the economy's potent recession, which has been slow to heal. Housing remains wounded, and the prospect of high unemployment still looms. The suggestion is that, lesson learned, consumers have become more responsible, or at least more careful, in their borrowing. Necessities such as back-to-school goods, along with education loans and auto purchases, while tapping into credit card borrowing less overall, may intimate that the change in borrowing and spending habits will become ingrained. Still, it's likely too early to tell how much of a solid trend this could be.

The Bottom Line
As consumer spending accounts for roughly two-thirds of U.S. economic activity, the consumer's behavior and moods are closely watched. The signals may be forming as to whether the consumer has been permanently changed by the experience of this recession. It's certainly possible, but there are clues that the economy will have changed in permanent ways, too. Even now, the credit picture has been altered by higher loan standards and much more conservative lending. The consumer picture needs to be kept in mind when assessing all kinds of stocks, from financial companies to retailers who are on the front lines of consumer business. If there's a new economy, must there of necessity be a new consumer? (For additional reading, see Consumer Credit Report: What's On It.)

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