Consumer credit plunges

We were out using our American Express card at Costco a short time ago, doing our small part to expand consumer credit (that is, until the bill comes next month) in order to help out the struggling economy, when the Federal Reserve reported that other American consumers haven't been lifting their weight lately as the month of July saw a record contraction in outstanding consumer credit, a plunge of some $21.6 billion.

Apparently, consumers tightening their belts and banks tightening their lending standards are combining to make this economic recovery more difficult than it would otherwise be, as detailed in this report at Bloomberg:

Consumer credit fell by a record $21.6 billion, or 10 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $15.5 billion in June, more than previously estimated. Credit fell for a sixth month, the longest series of declines since 1991.

The credit crunch, stagnant incomes and declines in household wealth are casting doubt on the strength of the economic recovery. The arrival of the government’s “cash for clunkers” program in late July wasn’t enough to keep credit that covers car loans from plummeting by a record amount, as consumers delayed other purchases.

“Lenders are restricting access to credit because risk has increased and that is intersecting with households reducing their leverage,” said Richard DeKaser, chief economist at Woodley Park Research in Washington, whose forecast of a decline of $12 billion was the most pessimistic among economists surveyed. “Cash-for-clunkers is to some extent shifting demand from one place to another, not creating it.”

Credit may have expanded again in August due largely to the wildly popular "Cash for Clunkers" program, but September is another matter.

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