Monday, March 8, 2010

Another Hopeful Sign

The Lehmann Letter (SM)

On Friday the Federal Reserve released its latest data on consumer credit:

These are loans made to households to finance the purchase of automobiles and other consumer durables. It does not include mortgage borrowing.
As you can see from the chart below, during the recent reces
sion consumer credit plunged to its worst low since World War II. Households stopped borrowing and begin repaying their debts at a record pace. Household priorities switched from making expenditures to repairing balance sheets.

We might ordinarily think of this as a good sign, but keep in mind that household borrowing finances household spending. Borrowing's collapse is a symptom of spending's collapse. It's another sign of the recent recession's severity.

Consumer Credit

(Click on chart to enlarge.)

Recessions shaded

But January's report (the latest month for which data is available) is a sign of hope. Consumer credit increased by $60 billion at a seasonally adjusted annual rate. Although, if you update the chart in your mind's eye, this is a relatively small increase, it is certainly an improvement over the $100 billion reductions that were the recent norm.

This report is only a single month’s data and is far from the $100 billion to $150 billion increases that were the norm for the previous decade. You can see how variable the data are, so we could slip into negative territory with next month's report. Nonetheless the latest news was good news, and let's hope there is more of it.

(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.)

© 2010 Michael B. Lehmann

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