Thursday, October 8, 2009

Consumer Credit Continues to Compress in August

On the back of last month's reveal of July's dramatic 10% annualized drop in consumer credit [Sep 8, 2009: Consumer Credit Tumbles at 10% Annualized Pace] yesterday we saw a subsidized drop of 5.8% for August. The market sniffed at it for about 3 minutes, than proceeded to do the only thing it knows to do nowadays - ignore it. Remember, good news is good news and bad news means more stimulus is coming.

5.8% in and of itself is an alarming drop off, and folks this is no improvement over August's levels... Cash for Clunkers hit big time in August - essentially employing generational arbitrage to persuade the debtors of today to get even more over their head. Again let me repeat what I wrote last month, and wrote in 2008, and wrote in 2007: doesn't bode well (near to intermediate term) for the 70% of the economy that is based on "spending". It does bode well for the long run as Americans actually act rationale and try to shed debt. Part of this data set is due to financial institutions pulling back on credit, but much of it is the reality that many Americans have enough stuff and need to delever.

After 25 years of debt accumulation at which point anyone who doubted the American consumer was made a fool, the average domestic shopper has finally been "scared straight" if you will. This was finally the turning point where they have seen what little cushion they truly have when times get rough. As I've been saying for 2+ years, without a house ATM to provide a secret piggy
bank, consumption patterns will change significantly for many.

But, the government does not want this to happen - spending is our culture and it must continue or else things get even more ugly in the near term. House ATM gone? No problem - the government ATM has replaced it. As we all know by now - the solution to a crisis brought upon by easy money and lax standards for credit? Even easier money with continued lax standards.

There are two kinds of debt in this survey - revolving and non revolving. Revolving debt (in which the government's plans to have us spend more on our credit cards have not been as successful) actually fell at an accelerated rate over July. However, the "savior" was non revolving debt as Cash for Clunkers helped to arrest the huge drop we solve last month. "Thankfully" the government has been successful in getting Americans to take on more auto debt.

Here are the numbers from July just to compare
  • 10.4% annualized drop aka $21.6 billion
  • non revolving: 11.7% annualized drop aka $15.4 billion
  • revolving: 8.1% annualized drop aka $6.1 billion
Now for August:
  • U.S. consumer credit fell in August for a seventh straight month as banks maintained restrictive terms and job losses made households reluctant to borrow.
  • Consumer credit fell by $12 billion, or 5.8 percent at an annual rate, to $2.46 trillion, according to a Federal Reserve report released today in Washington. The series of declines is the longest since 1991.
  • Revolving debt, such as credit cards, decreased by $9.91 billion in August, the Fed report showed. (that is a 50% increase in drop versus July!)
  • Non-revolving debt, including loans for automobiles and mobile homes, fell by $2.07 billion. (woo hoo - an 'improvement' if $13 billion versus July; only in America is borrowing MORE an improvement) The category that covers car loans fell at a slower pace as the government’s “cash for clunkers” program helped push up personal spending in August by the most since October 2001. (whose got one of those "Mission Accomplished" banners handy?)
  • The Fed’s report doesn’t cover borrowing secured by real estate.
  • “Demand for credit has just gone through the floor,” said Ellen Zentner, senior macro economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York. “Households are in paying- down-debt mode, they’re not in the mode of taking on new debt.”
But never fear, in between government handouts consumer spending just goes back to where it would be as the "non subsidized" economy shows its ugly face.
  • Outside of the cash-for-clunkers spending frenzy, which inherently may have required a purchaser to take out a loan, the decline in consumer credit would have continued to accelerate in August,” Bank of Tokyo-Mitsubishi UFJ’s Zentner said. “Come September, we’ll see consumer credit pick up its old trend and continue to drop” at an accelerating pace.
More subsidization PLEASE dear feckless, err.... fearless leaders!

Main Entry: feck·less
Pronunciation: \ˈfek-ləs\
Function: adjective
Etymology: Scots, from feck effect, majority, from Middle English (Scots) fek, alteration of Middle English effect
Date: circa 1585

1 : weak, ineffective
2 : worthless, irresponsible

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