Flow of money, credit essential for economic engines to function

Most mechanical devices benefit from some sort of lubrication to allow them to run more smoothly and to decrease wear on the internal parts due to use. For example, automotive engines require sufficient motor oil to keep them functioning as designed and allow them to endure the stresses and strains of constant use.

Similar to mechanical engines, the economic engine requires certain lubricants to keep it functioning effectively and efficiently.

Whether considering the U.S. economy or the global economy, the flow of money and associated credit are needed to allow these economic engines to function as desired.

The U.S. Federal Reserve monitors and reports on the behavior, contraction and expansion of consumer credit on a monthly basis. Results for the month and quarter ending June 30 were recently released.

Revolving and non-revolving credit outstanding is reported. For these Fed measures, aggregate consumer credit includes the majority of short-term and intermediate-term loans granted to individual borrowers. Where some borrowing is secured by real estate, this sort of lending is excluded from these Fed measures.

As reported by the Federal Reserve, non-revolving credit increased at an annual rate of 7.75 percent for the quarter ending June 30. This is down slightly from the annualized growth rate of 8.9 percent reported for the first quarter of 2012. Also during the second quarter, consumer revolving credit decreased at an annual rate of 0.5 percent.

For the quarter ending June 30, overall consumer credit increased 5 percent on a seasonally adjusted annual basis. This overall measure is also down slightly from the first quarter of 2012. Consumer credit increased at an annual rate of 5.9 percent in the first quarter.

Overall U.S. consumer credit was reported to have increased 3 percent for the month of June, down from 7.8 percent growth in May.

While credit is issued by a number of institutions, for the Fed's purposes six broad categories of debt holders are tracked. Based on the amount of consumer credit outstanding, the following are some of the larger holders of this debt: depositary institutions, finance companies, credit unions, the federal government and pools of securitized assets.

For the U.S. economy to function effectively, the amount of consumer credit outstanding and the creation of new credit are both critical. Growth in the velocity of credit creation over the medium term will be one signal of increasing strength of the U.S. economy.

Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.