Consumer Credit Growth Slows, Suggesting Consumption Will Lose Momentum in 2023

Key Takeaways:

• Consumer (non-mortgage) credit outstanding increased by $11.6 billion in December, a sharp slowdown from the upwardly revised $33.1 billion figure in November, according to the Federal Reserve Board. Revolving credit outstanding (largely credit cards) grew by $7.2 billion, roughly half the November increase and the smallest monthly gain since August 2021. Nonrevolving credit (largely student and auto loans) rose by $4.4 billion, the smallest increase since August 2020.
• The real goods U.S. trade deficit widened by $2.5 billion in December after narrowing by $16.3 billion in November, according to the Census Bureau. Real exports rose 1.6 percent, while real imports were up 2.0 percent.
• The Federal Reserve Board Senior Loan Officer Opinion Survey (SLOOS), for the three months ending in January, reported a net tightening of lending standards for all major residential mortgage types. Jumbo and subprime mortgage lending experienced the most rapid tightening of lending standards. For a sixth consecutive quarter, there was a decline in reported demand for all mortgage types.

Forecast Impact:

The sharp slowdown in outstanding credit debt in December caused the ratio of credit debt outstanding to disposable personal income to level off at 25.2 percent, roughly one-tenth higher than pre-pandemic levels. While we caution against reading too much into one month of data, especially when seasonal adjustments play a significant role, the slowdown in credit growth is consistent with other reports that showed consumption weakening toward the end of Q4. Additionally, our forecast assumes that consumption growth is nearing its limit compared to incomes and that consumers will eventually retrench, helping to push the economy into a modest recession in the first half of 2023. Higher interest rates also limit how much consumers can look to credit to further push their purchasing power.

While the trade deficit expanded in December due to stronger imports, imports are generally offset by some combination of inventory investment and consumption growth, and the deficit expansion is unlikely to strongly impact our GDP forecast. In housing, the SLOOS indicated weakening demand for mortgages at the end of last year and a modest tightening in credit standards, consistent with ongoing weakness in the housing market in 2023.

Nathaniel Drake
Economic and Strategic Research Group
February 10, 2023

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