A recent report by Moody’s Analytics found that the decline of consumer credit balances has slowed. This might potentially serve as signs of credit recovery and the end of deleveraging. However, any continued improvement is predicated on the strength of the macroeconomic recovery.

Credit card balances have grown in June, according to the firm, marking the first increase since January and the first rise in June since 2008.

Moody’s Analytics’ Senior Director of Consumer Economics Scott Hoyt believes the trend can be attributed to both the need for credit in a weak economy as well as easing lending standards. However, he did warn that it could partly be caused by consumers coping with increased gasoline prices.

“As the economy accelerates, consumers are going to get more confident, they’re going to want to spend more, especially in the current environment where they’ve been spending so little. There’s a lot of pent-up demand,” Hoyt said. As a result, he believes net borrowing will increase.  

Additionally, the year-over-year decline in credit card balances fell to less than 7.5% last month, down from 10% in March, which possibly signifies the gradual end of deleveraging.

“Deleveraging is already over for autos, in the credit card sphere it will probably play out in the next six to nine months,” Hoyt said. “We definitely think the process is underway, and as the economy accelerates in the second half of the year and into next year, things will move more quickly.”

The report stated that auto balances were also above their year-ago levels for the second time since 2008 in spite of the continued decrease in new-vehicle sales to 11.4 million units, down from 11.8 million in May and 13.1 million April. 

“Assuming we get a pickup in job growth and the supply chain issues go away, there’s no reason for that not to resume,” Hoyt said.

The report suggested that rising used vehicle prices may be supporting the larger auto balances.

“We definitely think that the economy is going to pick-up, demand for credit is going to pick-up, it's pretty clear that at least, outside of mortgages, lenders have already started to gradually ease standards and, with the delinquency and default rates trending down, there’s no reason for that trend not to continue.”

Hoyt added that the recovery of mortgage lending is particularly difficult to put a timeline on because of various unknowns.

“Mortgages are challenging because it’s hard to predict exactly what’s going to go on with foreclosures, all the paperwork and regulatory issues that are going on that impact balances both directly, because obviously more foreclosures mean fewer balances, and indirectly, because if you get the paperwork issues to go away you would actually have an increase in the number of foreclosure sales, which would push prices down,” he said. 

He added that many of the movements in balances right now are determined as much by what lenders are doing by way of standards as they are by what consumers are doing.

Recovery Outlook

While recent issues —  such as the spike in gasoline prices and supply-chain effects resulting from natural disasters — were cited as dragging on the recovery, Hoyt believes their impact will only be temporary.

Job growth, he said, was the most important factor for not only in terms of credit recovery, but toward macroeconomic improvement as well.  “Job growth is a factor in everything,” he said.

However, the report also mentioned that the ongoing decline in house prices also poses a considerable threat to the recovery, as any further downturn would decrease consumer spending and tighten lending once again. This would slow improvement while simultaneously accelerating deleveraging.

Overall, Hoyt’s outlook on the credit recovery is positive and expects credit card balance growth to reach double-digit year-over-year growth in 2012 and 2013.

“It’s more a question of the timing and pace, that’s tricky to put your arms around right now, than whether things are going to improve,” he said.



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