Today, the Federal Reserve announced that total U.S. consumer credit fell by $12 billion in the month of August (a drop of $10 billion was expected). The index, which covers most short term and intermediate term credit including credit card debt, has now declined for the seventh consecutive month as consumers are borrowing less money, saving more, and paying down their existing debt (see chart below). It is not surprising to see this behavioral change as unemployment continues to grind higher, and hopes for a consumer led recovery are slowly crushed.
As the consumer is currently 70% of the economy in the U.S. this is definitely a near term headwind as we recover from the worst recession in 70 years. And most experts expect this decline to continue as unemployment will remain at elevated levels, banks continue to reduce credit lines available to the consumer, and new credit card reforms hinder their growth. However, this is a very important trend leading to long term, positive fundamentals in our economy. Americans are starting to get their budgets in order and ridding themselves of excessive debt but watch out world – you will have to pick up the slack in demand!
