At 3 p.m. on October 7 the Federal Reserve reported that, as expected, consumer credit fell for the seventh consecutive month in August..
The drop of $12 billion was even worse than the consensus prediction going into the report of a $10 billion drop.
If you’re looking for a bit of sunshine in these numbers, I’ve got two isolated rays for you: First, the drop wasn’t nearly as bad as the record $21.6 billion plummet in July, and second, since these numbers lag so badly maybe things aren’t as bad now as they were then. Although I wouldn’t bet on it, since the biggest part of the August decline came in credit card borrowing and other data shows that credit in that sector continuing to decline.Â
This is the first time consumer borrowing has dropped for seven consecutive months since 1991. In severity, however, this plunge beats the 1991 drop cold. This slide has already seen consumer credit contract by 3.6% or $92 billion. The 1991 drop saw a contraction of just 1.2%.
It’s going to be hard to get a sustained recovery until consumer credit starts to expand. That looks a way off.
Scotsws, no disagreement at all. The big problem is that the world is addicted to U.S.consujmer debt. If the U.S.consumer stops spending, there’s nobody ready to step up. You’ve got a number of countries that couild comfortably increase their domestic consumer spending–China and Japan come to mind–because they have huge domestic saving. But that will require major structural adjustments in their economies. Even if that’s going to happen, it will take years. And what do we do in the meantime? A recession or a depression certainly puts enogh fear into people so they want to save. Many, though, don’t have anything to save since they lose their jobs. It took a long time to get us into this hole. It’s going to take a long time to get out.
actually scottsws, you don’t seem to be disagreeing with Jim so much as you are making a seperate point. In fact, Jim has said before that this reduction in debt is great for the long term american balance sheet as well as the need for people to live within their means. He is merely pointing out that since consumer spending makes up such a huge portion of the economy, this reduction in debt is going to put a significant drag on any recovery (something us investors need to think about when placing our bets).
I’m sorry, but I have to respectfully disagree. Too much debt got us into this fix. Consumers need to take responsibility for their own finances. Paying down debt is the only long term solution to our economic malaise. Sure a return to our spendthrift ways might help the economy in the short term, but that won’t help us in the longer term. People need to spend less than they earn. It’s the only way to financial security — bar luck such as the lottery or an inheritance.
With the Baby Boomers due to start retiring in droves over then next ten years, this problem will only get worse.
Jim. You started consumer debt shrank a total of 3.6 percent over the past seven months. That’s really pitiful in the midst of the Great Recession. Multiply that by ten and it will be a good start.
Jim I am very happy to see your Moneyshow videos linked here! thanks, I am looking forward to hearing your view on the semicondictor industry later this month.
Cash for clunkers may have affected the number in August. Assuming the average car cost 25000, the 3 billion program would equal about 15 billion in new debt. Would the housing stimulus bill influence the amount of consumer credit, or is mortgage debt a seperate statistic? The drop in consumer debt may actually pick back up in September/October. What are your thoughts?