Data released on Wednesday show US consumer credit declined for the seventh straight month in August as wary, cash-strapped consumers kept their credit cards in their wallets.
The Federal Reserve said consumer credit outstanding fell by a more-than-expected $12bn in August to $2,460bn. The seven-month stretch of declines is the longest since 1991, according to Bloomberg data. And – get this – the metric has never decreased for eight consecutive months in the 50 or so years the Fed has kept tabs.
Credit dropped by $19bn in July, the Fed said, less than the previously estimated (and record) $21.6bn.
Analysts at BNP Paribas noted that while consumer thriftiness is the primary reason for the credit contraction, it is not the only one. Emphasis FT Alphaville’s:
In the past few months the Federal Reserve has frequently voiced concern that consumers are not getting new credit as banks have seriously tightened up their lending standards. As the flow of consumer credit has slowed it has impeded the progress of one of the most important channels of monetary stimulus: credit. Consumer credit has decreased at an annualized rate of 9% in the first 6 months of this year from its cyclical and historic peak in Q4 2008.
The decline in consumer credit in August was very revealing since in August consumer spending increased by 1.3%, the largest m/m increase since October 2001. Even non revolving credit, which is mainly used to finance large durable purchases (think vehicles), declined in August. It reveals that consumers are attempting to shrink their indebtedness even when tempted into increased consumption by fiscal programs. All other major types of household liabilities are presently running down. Household mortgages have declined by 1.4% in the previous 6 quarters, and direct bank loans to consumers have decreased by 2.4% in the past year.
The irony of all this, as BNP Paribas explain, is that having too much credit caused many of the current problems:
Of course too much credit is also a problem and that is one of the dilemmas in the nascent recovery from the great recession. Consumers have too much debt. The stock of household debt relative to their disposable income remains extraordinarily high. The present ratio is 129% of DPI and it is very high by historic comparisons, albeit this ratio has slipped from an all time peak of 135% of DPI in Q4 2007. Many academics including economists in the Federal Reserve system have analysed this key issue and concluded that debt to income ratios above 100% were unstable, and could not be sustained. Thus, the debt to DPI ratio should decline, hopefully not too fast for if it were to decline rapidly it would become such a serious constraint on consumer spending that it could derail the present economic recovery.
Moreover:
The elevated debt to DPI ratio is a more threatening concern when interpreted in conjunction with the tremendous decline in household net worth, which had depreciated by 21.7% at its lowest in Q1 2009. In Q2 household net worth recovered slightly and the cycle loss now totals 18.7%. In Q2 2009 a big increase in stock prices boosted households direct and indirect ownership of equities significantly and accounted for more than 100% of the net gain in assets and therefore of the improvement in household net worth.
Gluskin Sheff’s David Rosenberg also weighed in – bearishly, as one would expect. Emphasis ours:
the tidal wave of the credit collapse continues unabated, and this is the primary reason why bond yields are still in a fundamental downtrend. Keep in mind that the $12 billion (5.8% annualized decline) reduction took hold during the peak for cash-for-clunker auto sales in August when they soared temporarily to a 14 million annual rate (and subsequently to 9.2mln in September). This held the contraction in non-revolving credit to $2.1 billion – based on what the pace had been running in recent months, it seems as though the total decline outside of the auto subsidy would have exceeded $20 billion during the month.
Over the past year, consumers have run down their debt by a record $113 billion (and this does not include mortgages). This is an absolutely epic shift in household attitudes towards credit and discretionary spending.
It’s worth pointing out, in the spirit of presenting both the bull and the bear cases, that Goldman Sachs disagree with the idea that consumer deleveraging will derail the economic recovery in the US.
As FT Alphaville reported in September, the view from the Goldman offices isn’t quite so dismal:
. . . we see a number of tangible offsets to the deleveraging cycle over both the near term (when deleveraging will pose the greatest drag on growth) and the medium term. In the near term, continued fiscal stimulus and a slowing in the pace of inventory liquidation should help boost growth to about 3% in 2009H2 in the US, and possibly even higher.
Related links:
Taking stock of unemployment – John Authers / Short View
Outlook for US consumer-facing sectors still poor, S&P says – FT Alphaville
US consumers: massive deleveraging in full swing – FT Alphaville
US consumers still not feeling confident. Housing data suggest why – FT Alphaville