Wednesday, September 9, 2009

Consumer credit will come back when the labor market turns

The Federal Reserve Board released its consumer credit for the month of July:
Consumer credit decreased at an annual rate of 10-1/2 percent in July 2009. Revolving credit decreased at an annual rate of 8 percent, and nonrevolving credit decreased at an annual rate of 11-3/4 percent.
This report describes the full non real estate consumer lending space – securitized, loans from finance companies, government lending, as well as commercial bank, credit union, and saving institutions lending - it's much bigger than the Fed's commercial bank weekly lending series. This month, the broad drop in credit was a shock to the downside, but not unexpected given that the unemployment rate is more than double that which the CBO deems to be the long-run level (see the NAIRU level of unemployment, 4.8%).

On a seasonally adjusted basis, total consumer credit tumbled at a 7.1% 3-month annualized pace (a little more smoothed than the monthly series).

The chart illustrates the 3-month annualized growth rate of consumer credit (total = revolving + non-revolving) and the unemployment rate. The negative correlation is very strong during periods when the unemployment rate is rising quickly - this time around is no exception.

Why is consumer credit falling? Is it due to tight lending standards? Or rather is it precipitously falling consumers demand for credit? That information is not available in the data, however, the Federal Reserve’s Senior Loan Officer Survey an increasing share of banks reported falling demand for consumer credit in the second quarter of 2009. Standards are still tightening, but a falling share of banks report having done so.

My bet's that the demand-side is driving the credit at this point in the cycle. But I have also argued that the revolving credit lines (i.e., credit cards) took a hit in response to recent credit card regulation. As an anecdote, I saw two of my cards canceled for inactivity, and others have seen their credit limits slashed. Would I have used those cards had they not been canceled? Point: in some cases, consumers are being forced to reduce revolving credit.

It's all about the labor market and renewed confidence. As the domestic stimulus further underpins the economy, and as the US reaps the benefits of big, big global stimulus, confidence will, more likely than not, re-emerge.

Rebecca Wilder


  1. In the mean time, instead of helping to grow the job market, the banks have been trying to support themselves with more aggressive usury. When does the Office of the Comptroller of the Currency step in and say, start making a quota of Small Business Administration loans or you lose your charter? When does the government put a stop to usury?

  2. A recovery based on the labor market and renewed confidence simply cannot happen.

    Confidence comes long after trust is restored. But trust in the honesty of the US administration and the Banks is simply gone - with absolutely no hope of returning as long as the hiding of bad assets and losses through bending of accounting rules and endless bailouts of the corrupt and the incompetent carries on, which they will because the Obama presidency, instead of "change", is showing us exactly what would have happened if Bush had been re-elected; this is not a great confidence booster!!

    The labour market loses 400K jobs per month, 'nuff said!