Why strong credit card growth confirms gains for retailers

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Key economic indicator releases that could impact ETF investments (Part 5 of 8)

(Continued from Part 4)

Strong credit card growth

The Federal Reserve Board of Governors released their report on consumer credit for the month of May on Tuesday, July 8. Consumer credit represents the dollar value of consumer installment credit outstanding. The headline number is total consumer debt. It measures the debt level of private individuals.

The report classifies the total debt outstanding as revolving and non-revolving. Revolving debt is renewable without approval from the lender—like credit card debt. In contrast, non-revolving debt is things like student loans and car loans. The report further categorizes debt as dues to various institutions, such as commercial banks, finance companies, the federal government, or Sallie Mae (SLM). The report also discloses the terms of credit for car and personal loans.

The consumer credit report is important because it also helps estimate the spreads consumers pay above the Fed funds rate.

Highlights from May’s report

Consumer credit increased by $19.6 billion in May following a revised gain of $26.1 billion in April. Gains for revolving credit, up by $1.8 billion in the month, points to strong credit card use. Strong credit card loan growth confirms the gains to retailers like Amazon (AMZN) and Walmart (WMT). It’s reflected in retail indicators. Exchange-traded funds (or ETFs) like the State Street SPDR S&P Retail ETF (XRT) and the Market Vectors Retail ETF (RTH) track the performance of the retail sector in the U.S. Non-revolving credit, up $17.8 billion, continues to be driven by car loans as well as the government’s acquisition of student loans.

Investor’s takeaway

Changes in consumer credit indicate the state of consumer finances and indicate future spending patterns. Growth in consumer credit can hold positive or negative implications for the economy and markets. Economic activity is stimulated when consumers borrow within their means to buy cars and other major purchases. On the other hand, if consumers pile up too much debt relative to their income levels, they may have to stop spending on new goods and services just to pay off old debts. That could put a big dent in economic growth.

The demand for credit also has a direct bearing on interest rates. If the demand to borrow money exceeds the supply from willing lenders, interest rates rise. If credit demand falls and many willing lenders are fighting for customers, they may offer lower interest rates to attract business. Also, during times of distress in credit markets, consumer credit can give an idea about how willing banks are to lend.

While consumer credit showed signs of strengthening, inventory and sales took a balanced rise for the month of May. The next section in this series assesses the importance of inventory and sales data in the economy. It also analyzes how wholesale trade releases affect companies like Ford (or F) and General Motors (GM).

Continue to Part 6

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