Consumer Outstandings Accelerate, 
but not Debt per Borrower

The Federal Reserve Board provides monthly reports on the total amount of consumer installment credit outstanding in the U.S. These data track aggregate balances on auto loans, credit cards and other personal loans, but exclude, first and second mortgages and other loans secured by real estate. Consumers have consistently surprised analysts since last fall as aggregate borrowing has accelerated despite the Fed’s series of interest rate hikes. For all of 1999, consumer installment credit grew by 7.1%. That pace accelerated in the first quarter of 2000 to 10.3% (seasonally adjusted, annualized rate). Even after the gas price hikes and stock market volatility in April, consumer borrowing in May continued at a 9.8% annual rate. At the end of May, there was $1.45 trillion in consumer installment credit outstanding, of which $626 billion (43.2 %) was revolving and $823 billion was non-revolving.

During most of 1999, non-revolving credit, especially automobile loans, outpaced credit card borrowing. However, this trend reversed in the fourth quarter of 1999 and aggregate revolving credit soared at a seasonally adjusted annual rate of 13.4% in the first quarter of this year. The pace of revolving borrowing quickened to 13.8% in March before settling back to 12.7% in April and 9.0% in May.

Since the Fed’s installment credit statistics do not include loans secured by real estate, the apparent surge in aggregate borrowing is not particularly surprising, given the substantial hikes in mortgage interest rates over the past 12 months. As we have pointed out in previous issues, when rising rates sharply curtailed mortgage refinancing, they also reduced the transfer of consumer installment balances to lower-priced (and often tax deductible) mortgage loans. Consequently, in late 1999, consumer installment balances began rising as many consumers continued taking on additional installment debt but no longer rolled the balances into new mortgage loans or home equity lines.

Data from Trans Union’s TrenData database supports this interpretation. Total mortgage and consumer debt per borrower was $52,930 at the end of the first quarter, 2000, just 4.6% higher than one year earlier. On a year-over-year basis, total debt per borrower has been slowing since late-summer, 1999. The slowdown in debt per borrower stems from a sharp reduction in the growth of mortgage debt per borrower. Mortgage debt per borrower is about 2.5 times larger than non-mortgage debt per borrower, and consequently exerts greater influence over the change in total indebtedness.

As illustrated in the accompanying figure, as recently as second quarter, 1999 mortgage debt per borrower was growing at more than 10% per year. Interest rate hikes put the brakes on mortgage borrowing beginning in the fall of 1999. Interest rates on 30-year fixed-rate mortgages rose about 150 basis points between January, 1999 and June, 2000. By the first quarter, 2000, mortgage debt per borrower was growing at just 3.0%, year over year. In contrast, consumer (non-mortgage) debt per borrower was actually shrinking during the period of strongest growth in mortgage debt per borrower, but accelerated as mortgage growth slowed. Consequently, we suspect that the surprising strength of consumer installment credit in May, despite the interest rate hikes, more likely reflects the continued slowdown in mortgage borrowing and departure from the pattern during the last two years of rolling consumer balances into mortgage loans. As the interest rate hikes already in place continue to bite, we expect a modest slowdown in the growth of non-mortgage debt through the rest of the year.