Money Matters - Simplified

Consumer credit tumbles by a record amount in July

Neither the consumer spending nor the closed linked credit off-take is increasing at the requisite pace. Consumer spending rose 0.2 percent in July, following a 0.6 percent increase in June. According to estimates, the growth in consumer spending is likely to average 1.5 percent in the second half of this year

Washington, September 9 -- Indicating that a recovery from the unrelenting economic recession may still be a distant dream, Federal Reserve’s data revealed that consumers in the United States borrowed a record $21.6 billion less from financial institutions in the month of July.

Consumer credit fell by 10 percent to $2.5 trillion in July. Although the credit off-take declined for the sixth successive month, July’s drop was more than five times the economists’ forecast.

The dip in lending is partially due to the stringent norms being followed by institutions after the sub prime mortgage crisis and partly due to customer’s reluctance to get into the spending habit again.

The cautious customers
Many of the now extremely cautious households have only one thing on mind: ‘Get rid of the existing debt’, therefore going in for more credit is out of question.

Bernard Baumohl, chief global economist at The Economic Outlook Group in Princeton, New Jersey opined, “It is one more important sign that consumers are not going to be contributing very much to the economy for the balance of this year and probably for a good part of next year. Consumers will be in the background."

With the joblessness rate at a 26-year high of 9.7 percent and likely to cross the 10 percent mark by early next year, threat of unemployment looms large on the head of the average American.

Given the scenario, the country has already witnessed a drastic cut in spending. There is no way a recovery can happen unless the momentum in household spending picks up.

Non-revolving credit plunges
Non-revolving debt that includes loans for big ticket items such as automobiles, homes, holidays, education etc. plunged a colossal $15.4 billion to $1.6 trillion.

On the other hand, revolving credit, which primarily includes credit and charge cards, dipped $6.1 billion to $905.6 billion.

Cash for Clunkers put in its mite
The Cash for Clunkers program of the Obama administration was a blockbuster in itself, and it did prevent the credit that covers car loans from plunging by a record amount.

Guy LeBas, chief economist at Janney Montgomery Scott LLC in Philadelphia, highlighted and appreciated the role of the clunkers program. LeBas, however, said that from a long term perspective, the program was not big enough.

“There were some car purchases and we will see some short-term benefit” from the program. But one month is not enough to make the year,” said LeBas.

Charmaine Buskas, a senior economics strategist at TD Securities in Toronto opined, “Credit is still shrinking and that is going to have an impact on consumption. As such, this remains an important part of the recovery since without the smooth functioning of credit markets, the recovery may stall."