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Thursday, March 08, 2012

Claims & Consumer Credit

Unemployment claims are still good this week. The headline is 362K, which is very close to the 4wk running average at 455K. Continuing claims have not quite been following the very favorable sequence of initial claims over the last month, but they are so far only mildly worse. Really, it's all good. I'm waiting to see what the next update for covered employment shows. That should be interesting.

Consumer Credit was released yesterday. What's amazing about this is that it just doesn't go anywhere - the uptick in car sales ought to be pushing it further up.

Despite all those breathless articles about soaring consumer credit, of course CCs are not getting built up. What's soaring is student loans:

The red line, baby.

If you read the release, and look at the NSA detail for who has got what, the following details emerge for January.
A) On a seasonally adjusted basis, revolving (CCs) dropped 4.4% annualized. Non-revolving grew 14.7% annualized, for a net of 8.6%.

B) When you scroll down to the NSA detail, you see that non-revolving credit grew at just under 33 billion from December to January. The federal government accounted for almost 28 billion of that. This is extraordinary. Finance companies and non-financial companies either dropped a bit or remained the same. They get a good chunk of car loans.

C) Since Q1, the federal govenrment has increased its consumer debt by just under 98 billion. During that same period, all consumer credit increased about 133 billion. This is quite striking, because there is a roll effect seen in revolving credit balances when they are being used as a payment method. A 15% price increase in the goods bought should show up as a 15% increase in credit card balances even if they are only being used as a payment mechanism. Carried card balances must therefore still be dropping.

D) In Q1 of 2011, revolving credit was 779.6 and was reported in January at 812.1. The minimum roll effect should have been 60 billion, which is how I know CC balances are still being paid down. This does account for virtually all of the non-fedgov increase in consumer credit, though. Non-revolving credit in summary almost did not increase during the period aside from the federal government student loans - Q1 2011 balance is 1622.3 and Jan 2012 balance is 1723.5.

Taking all this data together, my impression is that student loans are pushing out all other consumer credit expansion. It's not that we don't have the money to lend - it's that consumers don't have the capacity to carry other debt. One would assume that parents, mostly, are also helping students pay for tuition and expenses and that this is sapping other consumption.

One possible explanation for the seeming paradox is that used car values have risen quite a bit, so many new car buyers may be turning in vehicles for very good trade-in values, and may be shifting to smaller, cheaper, higher-mileage vehicles, which tends to limit new car debt taken on. Still, this is remarkable.

Aren't student loans granted at the beginning of a semester? Eons ago, mine were. So, if that still holds, we should see some strong jumps in January and September rather than a smooth monthly curve.
Rick - some student loans come from the federal government. Those are usually disbursed periodically. Some loans are from Sallie Mae, and some are from banks/CUs. Some of those work on draws. In 2010 the system of federal subsidies for private lending was changed, and now the federal loans all go through the federal government.

Over the last decade, there have been a lot of changes in student lending, so it is impossible to compare properly over time using these releases.

For example, Sallie Mae was originally a GSE, but the privatization was completed in 2004. It applied for a bank charter and was rejected, so it is now categorized as a finance company. Here's some info about SLM Corp. This might be a better shorter summary.

Both banks and SLM originate the federal loans and service federal loans. Increasingly students seem to be borrowing not just tuition but living expenses, which has changed the pattern of draws.
Interesting. Could it be that higher-education woes are adding to our demographic woes?

It used to be that household formation by the 18-24 age bracket was a major driver of the economy as they married, had kids, took out mortgages, bought stuff on credit, etc. All those things create domestic economic activity. But if all the credit that would have gone to those activities goes to tuition instead, I suspect that doesn't recycle into wages the same way.
One other thing - As a result of the 2010 takeover, rates are scheduled to shoot up for many categories of student loans. Obama's "budget" suggests delaying the increase for a year. We'll see.

6.8% is a pretty high rate. You can see current rates in this fact sheet.
Neil - it goes into wages, but into a small segment of wages - the wages of education institution employees. That's run as a pyramid scheme. The top-ranked employees literally get rich, but most of the employees don't do that well, and that includes a lot of the instructional staff.
M_O_M, that's pretty much what I was thinking. The educational wages for the higher-ups will theoretically recycle into capital investment, but our cap-ex machine seems to be broken at the moment.
I'm pretty sure lots of students are expecting debt forgiveness.

455k -> 355k

Just pointing out a typo.

Girlfriend is in college. Classes packed.
We don't really need debt forgiveness. Just treat student loans like every other loan. Make them dischareable in bankruptcy and when permanently disabled. (one of the bankruptcy forums had a post from a lawyer who said it's practically impossible to get them discharged when you are permanently disabled.). Give Sallie Mae incentive to work with students to pay these off. Right now, Sallie Mae has no such incentive. In fact they'd prefer to pad the loan with penalties and charges, then force the student into default. It's nonsense for the Federal Government to guarantee these loans.

If the student loan program is brought back in line, tuition rates will be too. And maybe we can get to where it's enough to have training from a community college or a for pay college to get a job.
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