Consumption Inflection Point - No One Wants Credit; Consumer Spending Plans Plunge

Consumer credit has fallen an unprecedented 7 consecutive quarters. Moreover, credit is poised to plunge further as consumer spending plans are falling through the floor.

Bloomberg reports Consumer Credit in U.S. Declined More Than Forecast.

Consumer borrowing in the U.S. dropped in May more than forecast, a sign Americans are less willing to take on debt without an improvement in the labor market.

The $9.1 billion decrease followed a revised $14.9 billion slump in April that was initially estimated as a $1 billion increase, the Federal Reserve reported today in Washington. Economists projected a $2.3 billion drop in the May measure of credit card debt and non-revolving loans, according to a Bloomberg News survey of 34 economists.

Borrowing that’s increased twice since the end of 2008 shows consumer spending, which accounts for about 70 percent of the economy, will be restrained as Americans pay down debt. Banks also continue to restrict lending following the collapse of the housing market, Fed officials said after their policy meeting last month.
Consumer Credit This Recession vs. Last



The above chart courtesy of Chris Puplava at Financial Sense.

Note the remarkable difference in consumer attitudes the latest recession vs. 2001. This drop is unprecedented, at least back to the great depression.

Massive Chargeoffs or Consumers Paying down Debt?

Inquiring minds are asking an important question: Is the drop in consumer credit related to chargeoffs or because consumers are wildly motivated to pay down debt?

For some clues, please consider Credit-card debt drops 10.5% in May

Paying down credit-card debt appears to be on the upswing.

Consumers cut their outstanding revolving debt -– overwhelmingly credit cards -– by an annualized, seasonally adjusted rate of 10.5 percent in May, the Federal Reserve reported Thursday. That’s on the heels of an 11.8 percent drop in April. Revolving credit is a line of credit allowing consumers to pay all or part of an outstanding balance, and, as the balance is paid, it becomes available to spend again as credit.

But it might be premature to say that consumers have been scared straight.

The monthly consumer credit numbers tell only part of the story because it’s not yet known how much debt banks or merchants will charge-off, or remove from their books because they’ve deemed it uncollectable. The Fed’s charge-off numbers are released quarterly, and the first quarter’s 10.1 percent rate tied for the highest since the beginning of 1985, the latest period for which figures are readily available.

“Unfortunately we won’t know until the charge-off data comes out for the second quarter whether the reduction was actually due to consumers paying down their debt or the banks writing bad debt off the books,” Odysseas Papadimitriou, a former Capital One executive who is now founder and chief executive of credit-card research Web site Cardhub.com, said.

In the first quarter, for example, about 40 percent of the decline in credit-card debt was due to charge-offs, Cardhub.com said.

I believe it is safe to say we are seeing both writedowns and chargeoffs. The latter will lead to declining financial earnings unless provisions for losses cover the writeoffs.

I highly doubt loan loss provisions are adequate.