In April 2010, US consumer credit rose by a very modest $1.0bn. This was actually slightly above market expectations, which was for a decline of $1.0bn. The previous month’s data was revised from an initial increase of +$2.0bn to a decline of $5.4bn. US consumer credit (which excludes mortgage finance) has fallen in 15 of the last 18 months. Prior to January 2009, US consumer credit rose each month for a consecutive 125 months.
As mentioned above, this measure of US consumer credit excludes any mortgages advances and is split between revolving and non-revolving credit. The total amount of consumer credit (excluding mortgages) outstanding is currently $2.44 trillion, which is an amazing $134 billion below the peak level of consumer credit, which was recorded in July 2008.
Revolving credit is the smaller component of consumer credit and is typically represented by overdrafts. Non-revolving credit is about twice as big as revolving and typically includes facilities for the purchase of cars, education, mobile homes, and holidays. During April 2010, non-revolving credit rose by $9.5 billion, while revolving credit declined, by $8.5 billion.
Since the middle of 2008 the US consumer has been trying to de-leverage. This was reflected in a dramatic fall-off in mortgage advances during 2008/2009, but also in a sharp decline in consumer credit. This decline in consumer credit has been very unusual relative to the history of consumer credit. For example, over the years from 1995 to 2008 US consumer credit rose by a total of $1.56 trillion or at an average of $111.7 billion a year. In contrast, during 2009, US consumers reduced their credit (excluding mortgages), by a significant $109.7 billion.
The ratio of US household debt to disposable income is at 126.7% (Q4 2009), having peaked at 135.9% in Q1 2008 (new data out this week). However, at 126.7% the indebtedness ratio is still well above the average for the past ten years of 118%. Fortunately, the debt servicing ratio has declined to 12.6% of disposable income, which is still relatively high but well below the peak of 13.92% recorded in Q1 2008. It is also encouraging to see that US personal income has started to rise year-on-year (at least in nominal terms) and that consumer spending has now increased for 7 consecutive months (year-on-year, in nominal terms). The rate of growth in spending is outstripping the rate of growth in income, which means that personal savings levels are, once-again, moving lower.
Overall, the rate of contraction in consumer credit appears to be abating when measured on an annual basis. This coupled with a rise in personal income, an increase in consumer spending, and the very recent increase in employment suggests that the US consumer is past the worst of the recession. Consumer confidence remains extremely low, but also appears to be past the worst. Given that the US consumer remains highly indebted, with modest monthly savings, a significant acceleration in consumer credit at this stage of the cycle would actually be deeply concerning from both a banking perspective and from a consumer balance-sheet perspective. Rather, ideally, the US needs to see a combination of modest increases in credit coupled with a healthy and sustained increase in employment.
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