Consumer Credit & The Fed’s Forecast

The Lehmann Letter ©

The Federal Reserve released two sobering items this week.

On April 7 the Fed reported (http://www.federalreserve.gov/releases/g19/Current/) that consumer credit fell at an $88.8 billion annual rate in February. Household’s consumer debt has barely budged since mid 2008.

The chart shows that consumer credit had been growing at about $100 billion annually for the past 15 years. Now, you can see, it’s dipped sharply downward. Households are repaying their debts rather than initiating new borrowing.

When consumers feel good, they borrow and spend. When they don’t, they don’t. And that’s bad for the economy. We need all the borrowing and spending we can get right now.

Consumer Credit

(Click on chart to enlarge)

(Recessions shaded)

On April 8 the Fed released its minutes from the March 17 and 18 meeting of its Open Market Committee (http://www.federalreserve.gov/monetarypolicy/fomcminutes20090318.htm ).

The Fed’s staff economic outlook said (emphasis added):

“In the forecast prepared for the meeting, the staff revised down its outlook for economic activity. The deterioration in labor market conditions was rapid in recent months, with steep job losses across nearly all sectors. Industrial production continued to contract rapidly as firms responded to the falloff in demand and the buildup of some inventory overhangs. The incoming data on business spending suggested that business investment in equipment and structures continued to decline. Single-family housing starts had fallen to a post-World War II low in January, and demand for new homes remained weak. Both exports and imports retreated significantly in the fourth quarter of last year and appeared headed for comparable declines this quarter. Consumer outlays showed some signs of stabilizing at a low level, with real outlays for goods outside of motor vehicles recording gains in January and February. Financial conditions overall were even less supportive of economic activity, with broad equity indexes down significantly amid continued concerns about the health of the financial sector, the dollar stronger, and long-term interest rates higher. The staff's projections for real GDP in the second half of 2009 and in 2010 were revised down, with real GDP expected to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through, and the correction in housing activity comes to an end. The weaker trajectory of real output resulted in the projected path of the unemployment rate rising more steeply into early next year before flattening out at a high level over the rest of the year. The staff forecast for overall and core personal consumption expenditures (PCE) inflation over the next two years was revised down slightly. Both core and overall PCE price inflation were expected to be damped by low rates of resource utilization, falling import prices, and easing cost pressures as a result of the sharp net declines in oil and other raw materials prices since last summer.”

The consumer-credit numbers fit right in with this weak prognosis.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2009 Michael B. Lehmann