Monday, January 10, 2011

More Good News on Consumer Credit

The Lehmann Letter (SM)

Friday's employment report overshadowed another report released that day. The Federal Reserve announced that consumer credit grew by $16.8 billion at an annual rate in November:

That was a small but important gain. Total consumer credit outstanding peaked at $2,561.1 billion in 2008. By the end of last year's third quarter (September 30, 2010) consumer credit outstanding had fallen to $2,394.6 billion, a loss of almost $200 billion. Now it's back up to $2,403.0 billion, reflecting small but important gains in October and November. (Multiply monthly gains by 12 to obtain the annual change.)

If this trend holds, it means that households are borrowing again to purchase automobiles, furniture, appliances, home furnishings and all the other items we put on our credit cards. That's significant because, as the numbers illustrate, consumers spent two years paying back their debts as they reduced their purchases of these items. (Keep in mind that consumer credit does not include first and second mortgage loans.)

As this letter said last month: 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.

Consumer Credit

Click on chart to enlarge.)

Recessions shaded

The chart illustrates the problem’s significance. After growing by $100 billion monthly through 2008, consumer credit began falling by $100 billion monthly during the recession.

If the latest positive numbers hold, it could be the beginning of an important positive trend.

(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.)

© 2011 Michael B. Lehmann

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