Non-revolving Consumer Credit Backslides - Update
In a reversal of a 2.6% increase in non-revolving U.S. consumer credit during October 2009, non-revolving U.S. consumer credit fell at an annual rate of 3% in November 2009. In addition, total U.S. consumer credit decreased 8.5% in November 2009, while U.S. revolving consumer credit sharply fell 18.3%.
On a monetary basis, Federal Reserve estimates indicate that during the month of November 2009, consumer credit decreased from $2.482 trillion to $2.464 trillion. Revolving credit, which mostly consists of credit card debt, fell from $888 billion to $874 billion. Non-revolving credit, which consists of loans and financing, shrank from $1.594 trillion to $1.591 trillion.
Despite October 2009’s one-time increase in non-revolving credit, consumer credit activity has been stuck in a general pattern of decrease since the second half of 2008. Looking at recent performance, in October 2009, consumer credit decreased at an annual rate of 2% and revolving credit decreased at an annual rate of 9.9%; while in September 2009, consumer credit decreased at an annual rate of 7.2%, revolving credit decreased at an annual rate of 13.3%, and non-revolving credit decreased at an annual rate of 3.7%.
And in August 2009, consumer credit decreased at an annual rate of 5.8%, revolving credit decreased at an annual rate of 13.1%, and non-revolving credit decreased at an annual rate of 1.6%. During Q3 2009, consumer credit decreased at an annual rate of 3.3%, revolving credit decreased at an annual rate of 7.3%, and non-revolving credit decreased at an annual rate of 1.1%.
In monetary terms, consumer credit decreased from $2.49 trillion to $2.45 trillion during Q3 2009. Revolving credit fell from $911.7 billion to $889 billion. Non-revolving credit fell from $1.582 trillion to $1.567 trillion.
According to the Federal Reserve, consumers are also reducing their borrowing. During October 2009, consumer borrowing dropped about 36.5%, from $741.3 billion to $718.7 billion, continuing a general pattern of consumer borrowing decline that has existed since early 2008. In more recent months, during September 2009, consumer borrowing fell about 15.4%, from $750.9 billion to $741.3 billion. In August 2009, consumer borrowing fell about 6%, from $754.7 billion to $750.9 billion.
Consumers Spend, Earn, Save More
Following a brief return to fiscal responsibility in September 2009 and reversion to irresponsible financial habits in October 2009, U.S. consumers split the difference by increasing spending, earning and saving in November 2009. U.S. consumers’ personal consumption expenditures (PCE), which essentially reflect consumer spending, increased $45.7 billion, or 0.5%, in November. In contrast, PCE rose $61.3 billion, or 0.6%, in October, dropped $60.3 billion, or 0.6%, in September, and increased $139.8 billion, or 1.4%, in August.
Consumers tempered their increased spending by keeping it close to the percentage by which their income rose during the month. Consumer’s disposable personal income (DPI), representing personal income less current personal taxes, rose $54.1 billion, or 0.5%.
In addition, personal saving, which experienced a moderate decline of 3.9% in October, severe declines of 34.5% in August, 10.4% in July and 26.3% in June, and a surprising 15.8% increase in September, went up slightly in November. For the month, personal saving increased 1.6%, growing from $516.7 billion to $525.1 billion.
The Dangers of Credit-Fueled Spending
Considering how much of the mid-decade economic boom was supported by consumer credit and borrowing, the continuing decline of most of these figures does not bode well for retailers, or for the economy in general. In addition, while consumers’ apparent willingness to spend beyond their immediate incomes at the expense of saving may offer short-term economic benefits, in the long term it could do further damage to an already battered economy. Without access to credit or loans, these consumer spending levels would not be sustainable. If non-revolving credit continues to increase and consumer borrowing levels begin to change course, consumers may be able to sustain increased spending and decreased saving habits for a longer period of time, but at risk of another recession if lenders and financiers once again tighten their purse strings.
Further exacerbating the general decline in consumer credit levels are recent reports that U.S. credit card companies will cut credit card lines and close accounts in the months to come as the result of changes to consumer protection laws that make it more difficult for them to raise fees or interest rates. Reuters recently ran an article quoting analysts from Wall Street research firms such as Credit Suisse and KBW which said that available credit card lines could be reduced by as much as 20% from their current levels of $6 trillion USD.