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To Spend Or Not To Spend…

The Federal Reserve released the Consumer Credit data today which showed that consumer credit expanded by 6% in the second quarter of 2013. While revolving credit increased by approximately 2%, it was non revolving credit that posted a larger increase of 7.5%. This second quarter data comprised of preliminary figures for the month of June and revised numbers for April and May, with downward revisions made to both. Additionally for the month of June, revolving credit actually posted a decline of 3.8% and increase of 10% on the non-revolving credit front. So what does this indicate about the state of consumer's personal finances and the economy? Are these numbers a positive or negative signal for economic recovery? Consumer spending is a large portion of GDP growth and it can be financed from three major sources - personal income, personal savings and credit. In the month of June, while real personal consumption expenditures increased 0.1% over the previous month, real disposable personal income decreased by 0.1% and personal savings rate was at 4.6%.

Intuitively, it is good for economic growth for consumers to spend more on personal consumption because it fuels demand for goods and services that generate larger incomes for businesses that supply them. In turn these businesses hire more people to meet the increased demand for their products creating more consumers and more purchasing power. So the virtuous cycle continues. But it is also important to consider the source and nature of consumer spending. The non-revolving portion of credit shows an increase in spending in areas such as auto and education. Increased auto sales and credit is a sign of economic growth. What people spend on their credit cards is reflected in the revolving credit section of the consumer credit report. Today's report shows that consumers have pulled back on credit card spending due to higher payroll taxes affecting disposable income. While consumers being wary of spending on their credit cards may seem like a general lack of confidence, it may actually indicate that consumers are spending more in line with what can be sustained with their income. In the latter case it would actually be a healthy development in consumer behavior. Over the long term, sustainable spending is the kind of driver that can help accelerate economic recovery.