Consumers Cut Back

One small note on the economic data.

Consumer credit is shrinking at a fairly rapid rate. This is particularly true of credit card debt.

The facts:

Federal Reserve Board data for May shows total US consumer credit dropping $9.15 billion in May, down to a total outstanding debt of $2.42 trillion. That’s an annualized rate of decline of 4.5%. Since the economy plunged into disarray back in late 2008 we have seen 18 monthly declines in consumer credit out of 20 months. Going further back to the peak of debt, in July 2008, debt is down 6.1%.

The biggest decline has come in credit cards, where debt fell $7.32 billion in May, an annualized decline of 10.5%, and is now at a total of $830 billion. Since the peak credit card debt is down 14.9%.

As you can tell from these numbers the larger portion of consumer debt is not in credit cards, but in things such as car or student loans. Further: some of this decline is involuntary, being caused by banks writing off loans that they consider to be uncollectible.

The bigger story behind these numbers is not so much the decline, which is fairly inevitable in a recession, but in its persistence and depth. The drop in debt is an indication of the ongoing retrenchment that American consumers are going through as they adjust their balance sheets to what they consider to be more difficult and risky times. The implied shift towards thrift that the figures indicate would be laudable were the economy booming along, but in our topsy turvy world of crisis they augur poorly. They reinforce what we already know: the private sector, both businesses and consumers, is still in retreat.

Ironically this means that cash is being generated by the private sector – some is obviously being used to pay down debt – but is not going towards either consumption or investment. Instead we have fallen into the trap of being thrifty just when we need to step up and spend. It is this fear driven contraction by the private sector that is weighing down the economy.

While I am a big advocate of the need for both private and public sector fiscal restraint over the longer term, now is not the most appropriate time for consumers to get a case of thriftiness. Nor, for that matter, should businesses be sitting on all the piles of cash that they are.

On the brighter side – just – the American Bankers Association reports that delinquencies on credit cards are now falling and were at 3.88% of all accounts in the first quarter this year. This is the lowest delinquency rate since the first quarter of 2002 and well below the 4.39% rate of the fourth quarter 2009.

So not only are consumers paying down debt, they are paying on time with more frequency.

This reinforces the view that the surge into crisis has abated, and has been replaced not by a similar surge out, but by an excessive mood of caution.

This does not bode well for GDP as the year progresses. With neither consumption nor investment exactly leaping along we are likely to see only muddle and confusion.

With consumers in this kind of mood, the risks are increasing for a slowdown in the second half of the year.