Yesterday afternoon the Federal Reserve released its report on consumer installment credit for the month of September. Outstanding consumer installment credit grew by $5.4 billion in September, an annualized rate of growth of 6.6%. This compares with growth of $10.3 billion and an annualized growth rate of 12.7% during August.

Consumer credit consists of four major types of short term borrowing: 1.) automobile loans, 2.) revolving credit (credit card balances), 3.) mobile home loans, and 4.) credit for other purposes extended by retailers, banks, S+L's, credit unions, and finance companies.

The total amount of outstanding consumer debt has grown during most of the past 50 years pausing occasionally for a breather, usually during a period of economic recession. At the end of September this total stood at just under $998 billion -- almost a trillion dollars.

Following the 1990-91 recession, demand for credit fell. From December 1990 to December 1992 total consumer installment credit dropped from $735 billion to $731 billion. But, this was just a temporary pause. During 1993 installment credit rose $59.5 billion or 8.41%. In 1994 installment credit surged by $112.5 billion or 14.23%. For 1995, through September, total consumer installment credit grew by $92.3 billion or an annualized rate of 13.63%.

Because of the relatively low installment debt growth in September, some analysts are speculating that consumers are tapped out. They are unable to squeeze further money out of their budgets to buy more stuff on the easy payment plan. Let's look back over the quarterly changes in installment credit growth for the past several quarters and see if we can detect a slowdown.

                        Year       1994                      1995
                      Quarter      III       IV         I            II            III
Annualized % Change    14.9        13.4     13.7       15.9         10.0

Based on the data in the table it does seem, at least for the time being, that the growth of consumer installment debt has slowed somewhat. But, on a historical basis, the ten-percent-per-year growth rate is still high.

It should come as a surprise to no one if the growth of consumer debt slows somewhat. You might recall, from yesterday's report on productivity, that real wages have grown at an annual rate of less than 0.3% during the past two years. It seems that wage earners, in the absence of any real growth in spendable income, have turned to the installment credit markets to enhance their purchasing power. But sooner or later, if real wage growth is static, consumers will no longer be able to make the low monthly easy credit payments, and the surging growth of consumer installment credit will slow down.

If you are a regular reader of these daily articles you know that consumer spending accounts for 2/3 of the Gross Domestic Product -- the master measure of the state of the U.S. economy. Thus, any changes in consumer purchases have a direct impact on the rate of growth of GDP. Every recession in the past 50 years has been preceded by a fall off in the rate of growth of consumer installment credit. Is the September data predicting a recession? It's too soon to tell. But, during the months to come, we should be keeping an eye on consumer credit growth data to see what happens next.

Byline: Lafferty (MF Merlin)

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