Wednesday, September 9, 2009

Good News… Bad News

The Lehmann Letter ©

Today the Federal Reserve released its Beige Book summary of economic conditions ( . The report began, “Reports from the 12 Federal Reserve Districts indicate that economic activity continued to stabilize in July and August.”

That’s good news: Stability is better than decline. Soon the recession will be over because a sufficient number of indicators are no longer falling.

But that’s not the same as robust recovery. Yesterday, for instance, the Fed reported that consumer credit fell by $21.5 billion or 10.4% ( ). That’s a $258 billion drop at an annual rate. Households are repaying their debts at a furious pace.

Compare this with the trends in the chart below.

Chart 5.6 Consumer Credit

(Click on image to enlarge.)

Recessions shaded

$258 billion is larger than any negative number recorded in past recessions. This is a measure of the dire straits we’re in. Households have reduced their expenditures to repay their debts to strengthen their balance sheets. There will be little evidence of improvement in the economy until households complete this project and begin borrowing and spending again.

Households go into debt when they feel good. They repay when they feel bad. Right now households are repaying their debts in order to bolster their balance sheets. Financial security has become more important than consumption.

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

© 2009 Michael B. Lehmann

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