Research and Statistics

Consumer credit plunges record $21.5 billion in July


Consumer debt fell by an unprecedented $21.5 billion in July, according to new Federal Reserve data, as consumers continued to shy away from borrowing in the recession.

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Consumer debt fell by an unprecedented $21.5 billion in July, according to new Federal Reserve data, as consumers continued to shy away from borrowing in the recession.

The Fed on Tuesday released its monthly G.19 report on consumer credit. That report looks at various components of consumer debt, including revolving credit — a loan category comprised almost entirely of credit card debt — as well as nonrevolving debt — which includes such debt as auto loans, student loans and loans for mobile homes, boats and trailers. Both components showed sharp decreases, with nonrevolving debt falling the furthest.

In the credit card category, the report showed revolving credit declined at an annualized rate of 8.0 percent in July, following a drop of 6.4 percent in June. Overall, revolving debt fell to $905.6 billion from a total of $911.7 billion in June.

According to analysts, much of the pullback in revolving debt can be largely traced to an uncertain labor market. “Anyone who becomes unemployed at this point is anticipating a fairly long term of unemployment, so they don’t want to run up their debt right now,” says Sean Maher, an associate economist with Moody’s

Consumer aversion to debt isn’t a sudden summer phenomenon. The 10 consecutive monthly declines in revolving credit from October 2008 to July 2009 represent the longest pullback since the report began in January 1968, according to the Fed.

Meanwhile, nonrevolving credit saw its biggest-ever decline in terms of dollar amount, plunging 11.7 percent in July to $1.567 trillion. Still, Maher predicts nonrevolving credit may reverse itself and grow in August’s report, which will include sales spurred by the federal government’s “cash for clunkers” program. That program allowed drivers to exchange older vehicles for new, more fuel-efficient models.

Taken as a whole, consumer debt fell by a massive $21.5 billion — also a record in terms of dollar amount — to $2.472 trillion in July. Analysts surveyed by Thomson Reuters had predicted a $4.5 billion decline in overall consumer debt.

Spending down, savings up

Credit card balances are declining as consumers direct their incomes away from spending and toward saving.

In July, consumer spending got a boost from the government’s Cash for Clunkers program, edging up 0.2 percent. That program allowed drivers to exchange older vehicles for new, more fuel-efficient models. However, when auto sales are excluded, consumer spending was flat. Meanwhile, personal incomes were unchanged.

In the minutes from its most recent meeting, the Fed acknowledged this poor consumer spending. “Apart from a jump in motor vehicle purchases, which were boosted appreciably by the government’s ‘cash-for-clunkers’ program, indicators of consumer spending in July were mixed,” the Fed said. “Most determinants of spending remained weak on balance. In particular, the weak labor market continued to place significant strains on household income, and earlier declines in net worth were still holding back spending.”

Instead, consumers continued to save in July. The personal saving rate, as a percentage of disposable personal income, was 4.2 percent, down slightly from a savings rate of 4.5 percent in June. Although the amount of money people socked away dipped a little, analysts still view it as part of an ongoing trend. “I think this is a sign that consumers are in the process of deleveraging themselves a little,” says Maher, referring to borrower efforts to trim debt levels.

Most consumers are “trying to rebuild their cash cushion. They’ve lost value on their homes, so that’s no longer a source of income that consumers can use,” Maher says, adding that he expects the savings rate to continue inching up over the coming months.

In recent years, the savings rate was “extremely low by historical standards, and we don’t think that’s going to be a sustainable trend over the future,” Maher says. “So the demand for credit is going to be lower after this whole wake-up call from this recession.”

Signs of life?

Some say borrowers’ relationship with plastic may have been fundamentally altered. However, pointing to economic indicators that reflect growing consumer confidence , economists say it is only a matter of time before credit cards re-emerge from consumers’ wallets.

“Consumers are starting to see slight improvements in the economy and are becoming more confident in the future. This could bode well for credit card usage, although I think it could be a while before we see an increase in demand take effect,” Maher says. As to when that might be, Maher says consumer spending — and revolving credit balances — could pick up in the second half of 2010. According to Maher, that timing coincides with the Fed’s senior loan officer survey that indicated banks expect a return to normal lending standards next year.

There is another, less sunny reason that cardholders may return to plastic — job loss.

“When people become unemployed they may be forced to use credit cards for a short term to bridge the income gap,” Maher says. “Although given that consumer confidence is low right now and people know how bad the job market is they may not be willing to do that right now.”

See related:  Consumers growing in confidence, but still nervous

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