U.S. consumers shun credit cards in May, and borrowing cools

U.S. consumer credit growth decelerated sharply in May, rising by only $5.1 billion, well below the $10 billion forecast and significantly down from April's $16.9 billion. This slowdown was primarily driven by a 3.2% decline in revolving credit, marking its first drop since November. The data signals weakening consumer spending and reduced willingness to borrow, aligning with broader retail sales declines and reflecting the impact of a softening labor market, elevated prices, and high borrowing rates on consumer behavior.

Analysis

U.S. consumer credit growth decelerated sharply in May, expanding by only $5.1 billion, which is less than half the $10 billion consensus forecast and a significant drop from the $16.9 billion increase in April. The primary driver of this slowdown was a 3.2% annualized contraction in revolving credit, such as credit cards, marking its first decline since November and a stark reversal from the prior month's 6.9% gain. This pullback in consumer borrowing aligns with other weak macroeconomic data, including a 0.9% fall in May retail sales—the largest drop in two years—and slowing car sales. The data suggests that a combination of a softening labor market, persistently high prices, and elevated borrowing rates is eroding consumer confidence and willingness to spend. The market reaction, which saw the SPX trade lower and the 10-year Treasury yield rise to 4.418%, indicates that investors are pricing in the impact of a weakening consumer, a critical engine of the U.S. economy, amidst ongoing concerns about trade tariffs.

Key Decisions for Investors

• Investors should exercise caution with consumer discretionary sector exposure, as the significant drop in revolving credit directly signals weakening demand for non-essential goods and services.
• The combination of slowing credit growth and falling retail sales strengthens the case for a cooling economy, which may influence future Federal Reserve interest rate decisions and should be monitored closely.
• Given the negative sentiment and confluence of headwinds including tariff risks and rising yields, it is prudent to review portfolio allocations for defensiveness against potential equity market volatility and a broader economic slowdown.