Wikinvest Wire

Consumer credit contracts sharply

Friday, August 07, 2009

How can the U.S. economy expand if consumer credit continues to contract? Good question. And not one that stands any better chance of being answered in light of the most recent data on credit card and auto loan amounts outstanding as reported by Bloomberg.

Consumer credit in the U.S. declined in June for a fifth straight month as banks maintained tough lending terms and households remained reluctant to borrow money for major purchases.

Consumer credit fell $10.3 billion, or 4.92 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $5.38 billion in May, more than previously estimated. The series of declines is the longest since 1991.

Stagnant wages and falling home values mean consumer spending, about 70 percent of the economy, will take time to recover even as the recession eases.
“This string of declining credit should continue as long as the economy eliminates workers at an elevated pace,” said Richard Yamarone, director of economic research at Argus Research Corp. in New York. “We’re 20 months into the recession and the economy is still losing a quarter-of-a-million jobs per month.”
Importantly, consumer credit contains no housing related debt at all. One can only imagine how sharply outstanding home equity lines of credit and home equity loans are contracting these days. Is this data collected and published anywhere aside from at individual banks?


Anonymous said...

How can credit expand indefinitely? Something is wrong with the constant credit expansion theory. Private debt to GDP cannot expand beyond a certain level before the system becomes unstable.

Anonymous said...

Expect an editorial from Krugman denouncing savers as traitors to the economy.

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