This Expansion Doesn't Get A Lot Of Credit

Lending is fundamentally quite simple. Many of us first figured it out on the schoolyard, when we were asked to lend a classmate lunch money. The credit decision came down to three basic questions: How well do I know this person, and will I see him again? Is he the sort of person who borrows frequently? And does he have a good baseball card collection that I could pursue if he fails to pay me back?

As we grow older, the stakes of lending and borrowing get higher as we take out loans for business creation or major purchases like homes and automobiles. Credit files take the place of classroom observations. However, the decision still comes down to the “three C’s” of lending: assessing the borrower’s character, capacity and collateral.

This year, a new challenge has emerged for lenders, and the three C’s are now accompanied by a D: demand. Lenders have been accustomed to an ample flow of potential borrowers, which allowed them to be selective about the loans they issued. But now, demand for most types of loans is much lower than would be expected in a rapidly growing economy.

Consumer lending is showing uneven growth. Mortgage and auto balances have risen steadily, especially as those assets have gained value. Aggregate credit card balances, however, stand $140 billion below the level recorded at the end of 2019, holding at levels last seen in 2017.

In the recovery from a recession, we might expect consumers to spend less money, but that has not been the story this time around. Second quarter U.S. gross domestic product (GDP) growth was led by strong consumer spending. Retail sales are well above their pre-pandemic levels, and they do not fully reflect the rebound in services spending in this year of reopening. And card accounts are getting a workout: As e-commerce and contactless transactions have gained lasting popularity, consumers are certainly using their cards actively—but they are now more likely to pay their balances in full each month.

A very high level of saving is limiting the need for households to carry credit card balances. Most U.S. consumers have received at least $3,400 in direct stimulus payments since spring of 2020 (more for parents). For consumers living on tight budgets who carried credit card balances out of necessity, that cash infusion was an opportunity to pay down loans. With each successive round of stimulus payments, recipients were more likely to use the proceeds for saving or reducing debt. Personal saving rates set new records in the crisis, as consumers received payments with fewer opportunities to spend them. The most recent reading of 9.6% aggregate savings (as a percent of annual income) remains above the pre-pandemic norm.