Is there a growing credit gap?

Understanding the forces behind the demand for and supply of consumer credit is something of a guessing game, as the economy struggles to drag itself out of recession.  With consumer expenditure being such an important constituent of GDP, and credit availability in turn being such an important facilitator, it’s important to get a read on how the market might be moving.

Recent data has been mixed. Late last month the Department of Commerce reported flat consumer expenditure in April after strong increases in the prior 2 months. The FED reported that consumer  borrowing unexpectedly increased in April, on seasonally adjusted basis after falls in March and February. The short-term conclusion might be that consumers are still acting conservatively.

These lending numbers ,of course, reflect consumers’ appetite and lenders’ decisions. In a recent US survey of risk managers that FICO conducted in conjunction with PRMIA, we asked for opinions on how both demand and supply would shape up over the next 3 months.  Asked how they thought the demand for consumer credit would move over the coming months, less than 15% expected it to fall and over 50% expected a significant increase. At the same time, close to 40% of risk managers predicted an increase in lending standards — so that even if applicant quality remain the same, other things being equal, accept rates would fall.  Obviously there is an interaction of quality and volume that could still see lending rise, but in general there seems to be a widening “credit gap.”