Wednesday, December 8, 2010

Good News

The Lehmann Letter (SM)

Yesterday's letter highlighted auto sales: A key component of consumer demand. The letter pointed out that auto sales have bounced back from their recession lows, but still have a long way to go before regaining robust health.

Today's letter examines consumer credit: Another important indicator of household strength. Households have been repaying their debts in a desperate attempt to bolster their balance sheets by reducing liabilities and building liquidity. That seems like a good sign until one realizes that reducing expenditures is a time-tested method for paying down debt and conserving cash. That's one reason this recession has been so intractable. People have stopped buying in order to bolster their balance sheets. Demand can't fully recover until this process concludes.

That's why the Federal Reserve's latest consumer-credit report is so encouraging:

For the second month in a row households have originated more consumer credit then they've repaid. (Keep in mind that consumer credit does not include first and second mortgage loans. Think of consumer credit as auto loans and credit-card debt and conventional retail debt.)

Consumer Credit
Click on chart to enlarge.)

Recessions shaded

Consumer credit's recent gain was not large: Only a $45.6 billion October increase, seasonally adjusted at an annual rate, following a $15.6 billion bump in September. But the chart shows that consumer credit had been falling for over a year, often at a $100 billion a month rate. That was not only unprecedented, it was also a sign of how desperately households were trying to put their balance sheets in order.

Let's hope they've now done so and that September and October's improvements signal a trend. If that's the case, it could be a good sign that consumers will begin spending more heavily on autos, appliances and furniture and furnishings - all of which rely heavily on consumer credit for their strength.

Housing data, due later in the month, will serve to corroborate or offset this optimism. Real estate was ground zero for the slump and we will wait to see whether or not households have repaired their balance sheets sufficiently to boost home purchases. But, one way or the other, the recent improvement in consumer credit is good news.

(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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