Record Plunge in U.S. Consumer Credit Signals Weakened Spending

[SoCalDem]

http://www.bloomberg.com/apps/news?pid=20601087&sid=avvF5aNtrCfc


By Bob Willis and Vincent Del Giudice

Sept. 9 (Bloomberg) -- A record $21.6 billion drop in borrowing by Americans added to evidence that consumer spending will be slow to recover as banks and credit-card companies tighten lending standards and households pay down debt. Consumer credit fell by 10 percent at an annual rate in July to $2.5 trillion, according to a Federal Reserve report released yesterday in Washington. The drop was more than five times larger than economists forecast. Credit fell for a sixth month, the longest series of declines since 1991. “The consumer is hunkered down in the process of repairing his finances,” said Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania.“Consumers remain very cautious and won’t be leading us out of this recession.”
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The start of the government’s “cash for clunkers” program in late July wasn’t enough to keep credit that covers car loans from plummeting by a record amount, yesterday’s Fed report showed.Non-revolving debt, including loans for automobiles and mobile homes, plunged by $15.4 billion in July. The Fed’s report doesn’t cover borrowing secured by real estate. Revolving debt, such as credit cards, fell by $6.1 billion.

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Economists had forecast consumer credit would drop $4 billion in July, according to the median of 31 estimates in a Bloomberg News survey. Projections ranged from declines of $12 billion to no change from the previous month. Revolving credit may shrink by another 20 percent by the end of next year as banks pare credit lines further and more consumers turn to debit cards to pay their bills, said FBR Capital Markets Inc. analyst Scott Valentin.

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Economists in the survey didn’t see annual growth in consumer spending topping 2 percent until 2011, even as they forecast the economy to return to growth in the second half of this year.

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Plunging home values and stock prices have fueled a record $13.9 trillion loss in household wealth in the U.S. since the middle of 2007.

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The economy has lost 6.9 million jobs since the recession began in December 2007, the biggest drop in any post-World War II economic downturn.

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To contact the reporter on this story: Vincent Del Giudice in Washington [e-mail] Willis in Washington [e-mail]