The Federal Reserve's most recent Consumer Credit report showed credit borrowing up slightly in September with a continued downward trend in revolving credit as consumers improved their short-term outlook on the economy and earned more during the month.
The September Consumer Credit report showed a monthly increase of 0.5 percent in total credit outstanding and a gain of 3.4 percent for 2012.
Revolving credit levels, however, declined at a rate of 0.6 percent in September and have been trending downward. Year-to-date through September, revolving credit levels have decreased 3.7 percent. On a seasonally adjusted basis the annual revolving credit level also declined, falling 4.1 percent.
While total credit levels have been increasing, the decrease in revolving credit could indicate consumers are earning more disposable income allowing them to pay directly for short-term purchases and in turn increasing their confidence in intermediate-term borrowing for bigger ticket investments.
Personal income and outlays data from the Bureau of Economic Analysis supports this notion. In September, personal and disposable incomes increased 0.4 percent while real disposable income remained unchanged. Consumers increased their spending by 0.8 percent during the month of September with the majority of spending on goods versus services.
Consumers were also more optimistic about the economy in September. September's Thomson Reuters/University of Michigan Consumer Sentiment Index improved to 78.3 from 74.3. Consumers' increased confidence was driven by stock market gains and housing price improvements. Consumers also reported increased confidence in the economy's ability to create jobs.
October's Consumer Sentiment Index release showed continued support for improving consumer confidence. The Index gained an additional 4.3 points in October as consumers expressed optimism in their personal finance outlook and continued to gain confidence in the labor market.
As consumers' optimism increased, so did their confidence in spending for intermediate-term financed big ticket items. Non-revolving credit increased 1.1 percent in September and has gained 6.8 percent for the year. Annually, non-revolving credit has increased 9.2 percent.
Intermediate-term financial lending, for items such as auto loans, increased an average of 2.4 percent in September. Meanwhile, federal government lending, primarily for education loans, increased 2.8 percent.
The improvements in underlying economic data and intermediate-term lending activity are a positive sign for U.S. equity markets. While markets saw some of the year's greatest declines last week following the re-election of President Barack Obama and a shift in focus to the approaching fiscal cliff, consumers' spending and income patterns indicate that they are optimistic about the economy in the near-term.
Swift congressional action on tax debates and spending cuts to improve the federal budget deficit could continue to fuel investor's optimism and allow greater flexibility for investors seeking to reallocate investments based on new reform.
Given this scenario, equity markets could likely rebound from the previous week's lows, ending the year higher and giving further strength to the nation's recovery, despite tax burdens and spending reductions.
At September month-end, equity markets saw 2012 gains of 9.98 percent for the Dow Jones Industrial Average and 14.56 percent for the S&P 500. Month-to-date losses in November have canceled some of the Index gains, with a monthly market decrease of 2.23 percent for the Dow Jones Industrial Average and 2.27 percent for the S&P 500 Index.
If markets see signs of resolution in the fiscal cliff, bullish economists speculate markets returning to pre-election levels and ending the year higher. If continued uncertainty continues, however, decreasing equity market returns could erase the year's gains and add increased tax and decreased government spending burden on investors.