Consumer credit: largest gain in 16 years and well ahead of expectations

Economic data coming out of the United States continue to show a robust consumer-led expansion. The latest consumer credit report for November 2017 showed the largest monthly gain since November 2001, with outstanding consumer credit rising by $27.95 billion. Expectations were for $19 billion.

On the back of strong economic news, interest rates have been rising recently, with the US 10-year treasury bond hitting a yield of 2.50% earlier today. Shorter-duration US government bonds are also see yields rising, with the 2-year now trading at 1.95%, a whisker away from the 2% level.

According to the Federal Reserve, revolving credit levels — which are mostly credit cards — increased $11.19 billion, a prodigious 13.3% annualized pace in November.

While non-revolving credit, comprised mostly of student and auto loans, rose by more — $16.8 billion — the pace of growth was slower, at 7.2% annualized.

Analysts see this not as reflective of distress but buoyancy as the Conference Board’s measure of consumer confidence hit a 17-year high in November. Nomura, for one, released a note saying: “This appears consistent with a strong labor market with low unemployment and elevated consumer confidence, which we expect will continue in the near term.” 

Moreover, since consumer spending makes for almost 70 percent of the economy, these numbers bode well for economic growth figures to be released at the end of the month. The Atlanta Fed GDPNow tracker is at 2.7% right now, which is right about where private sector analysts see GDP coming in for Q4 2017.

The dark cloud in all of this is the fact that this is debt-fuelled consumption. And while the economy is growing briskly right now, the Fed’s data announcement means that US consumer debt is now $3.8 trillion.

My view: though US equities have surged a lot in the past year and are richly priced, continued positive economic data support further rises in equity prices. At the same time, we should see pressure on bond prices as yields rise. But without more signs of inflation, don’t expect a big widening in the spread between short and long-term bonds.