The Federal Reserve's March 7 report on January consumer credit outstanding showed data pointing to the start of a recovery in consumers’ willingness to maintain debt.

In a report that examined the headline numbers, however,  Wells Fargo analysts said that it seems that household deleveraging can still go on for some time.

Although the amount of revolving consumer credit has stabilized in the past several months, they said that the amount of non-revolving credit has been mostly driven in the past several months by rises in government-backed student loans.

Except for these government loans, Wells Fargo researchers said that  the outstanding amount of non-revolving consumer debt actually dropped once again in January.

The broad swings in growth rates around recession time periods shows how supply and demand for credit peaks just before a recession. The direct relationship between credit conditions and economic growth is significant, analysts said, since access to credit usually peaks just ahead of a recession.

Generally, access to credit has recovered quickly in post-recession periods, and growth rates have risen quickly as well.

The 2007-2009 recession period looks different versus previous economic cycles. Consumer credit outstanding contracted much more sharply compared with other periods, and the return to positive growth rates has been comparatively slow, analysts said. As of January this year, consumer credit stood 6.6% below the July 2008 peak.

While the consumer lending environment has improved in the past few months, it seems that borrowers are still wary of taking on new debts and the household balance sheet deleveraging might be protracted.

Analysts used total consumer credit outstanding as a percentage of disposable personal income as a household leverage measure. From 1959 to 1994, the average for this data series was 17.5%, and it varied between 16% and 20% depending on the where the the market was in the economic cycle.

They said that consumer credit as a percentage of income started to grow in 1995 at about the same time that stock market valuations accelerated. Consumer credit peaked at around 24% of income before starting to dip just ahead of the 2007 recession. This measure of leverage has dropped sharply in the past two years, and is now at 20.7% as of January 2011, circling back in line with 1996 levels, analysts said.

Currently the question is how much further this measure might go down. Growth in personal income has picked up momentum in the past 12 months. The total amount of consumer debt outstanding has began to stabilize, and this implies that the ratio of consumer credit/personal income could also begin to stabilize in coming months.

Alternatively, the ratio could drop further if consumer debt is slow to rise and household incomes continue to increase. Analysts' expectation would be for consumer leverage to further experience near-term dips, they said. This condition should still weigh on consumer ABS issuance trends.

The best news from the most recent data release, analysts said, is the signs of stabilizing revolving consumer credit. The market has seen a steady drop in revolving credit for around two and half years. The drop slowed in 2H10, and new consumer credit outstanding over the holidays improved versus 2009. January 2011 credit card payoffs were less compared with those of the prior January,  so revolving credit outstanding stayed in the $800 billion level.

The February report should corroborate that the revolving consumer credit decrease is lessening. For instance, the dips seen in February 2009 and February 2010 have been quite considerable. If some added moderation occurs, then it might be that the revolving credit market is turning the corner, analysts said. This might not really mean that credit card ABS will return, but it can be that the foundation for a credit card ABS recovery is being laid, they added.

Simultaneously, non-revolving consumer credit is still puzzling, analysts said. The headline numbers seemed comparatively strong when the January release came out, and the year-over-year rise was +1.7%. Some have said that the recent increases show increased auto demand. It might be true that consumers have returned to buying autos,  but on further examination it seems that consumers are still cautious in adding new debt to finance consumption, they said. Analysts would rather exclude the government sector from non-revolving debt that finances consumption. This is because government financing is mostly in education lending.

Analysts think that student loans can be better categorized as an investment in human capital instead of as financing added consumption. Based on this measure, non-revolving credit dropped again in January to $1.285 trillion, dipping $115.3 billion in the past 12 months. The auto market's recovery as well as the non-revolving consumer credit decline imply that households are still paying down outstanding debts more quickly versus taking on new debts. Auto transactions might be driven more by buyers who have been putting off a purchase and waiting for the job market to stabilize and their income to increase to the point that a car purchase becomes more affordable.

The sharp rise in the government sector non-revolving credit outstanding shows the government’s intervention to offer liquidity over the credit crisis and the later changes to the government-guaranteed student loan market in 2010. The FFELP lending program ended in July 2010, and government-guaranteed student loans migrated to a direct lending program from the Department of Education. Analysts think that this sector will still increase on a relative basis as legacy FFELP loans pay off and students take out new loans from the government.

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