Wednesday, September 9, 2009

Consumer Credit Contracts At Record Pace

Yesterday's release by the Federal Reserve of consumer credit numbers was not particularly pretty. The report showed consumer credit contracting for the sixth month in a row by a record $21.6 billion. Total borrowing, which includes most consumer loans except real estate, decreased at a seasonally adjusted rate in July to $2.47 trillion. This follows on the heels of a 7.4% annual rate of decline in June. I happen to think that a contraction of credit is very healthy for our economy in the long run, as I just don't think we can operate as a society that is leveraged out the yin yang any longer. Consumers must cut back back on spending, pay down debt, or just plain default and start over if they are to repair their balance sheets. However, this is one of the many reasons why I don't believe our economy can recover from this recession at a rapid clip. 70% of GDP is consumer spending. If consumers aren't spending, the odds of a quick bounce back to old GDP levels aren't looking too hot.

The WSJ has a great chart depicting outstanding consumer credit since 2004. I am including it because it paints a fairly obvious picture of what much of our economic growth was based upon in the years leading up to the credit crisis: excessive borrowing by consumers. As a reminder, this does not include mortgage debt. We're talking flat-screen TVs, dvd players and the like here. Way back in 2004, when the economy had already recovered from the last recession, consumer credit was $2.1 trillion. It hit a peak just shy of $2.6 trillion in mid-2008. It has now fallen to $2.47 trillion. We are currently $270 billion away from 2004 levels. Tuesday's report showed that 35% of banks tightened credit with no banks easing. Nearly half the banks surveyed also said they had decreased the size of credit card lines for existing customers with only 3% increasing them. So the trend is for a continued tightening despite the Fed's best efforts to flood the market with liquidity. Here's the chart:

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