In October 2010, US consumer credit rose by a modest $3.4bn. While the increase is very modest, it represents the second consecutive monthly rise in credit. The increase was above market expectations, which was for a contraction of $1.0bn. The previous month’s data was revised from an initial increase of $2.1bn to a rise of $1.2bn. Prior to the September and October 2010 increase, US consumer credit (which excludes mortgage finance) had fallen for 19 consecutive months. Prior to January 2009, US consumer credit rose each month for consecutive 125 months.
As mentioned above, this measure of US consumer credit excludes any mortgage advances and is split between revolving and non-revolving credit. The total amount of consumer credit (excluding mortgages) outstanding is currently $2.399 trillion, which is an amazing $182.6 billion below the peak level of consumer credit recorded in July 2008. In the past 12 months the US consumer has repaid a net $76.6 billion, but now appears to be slowly increasing their use of debt.
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 October 2010, non-revolving credit rose by $9.0 billion, while revolving credit declined by $5.6 billion.
Since the middle of 2008 the US consumer has been de-leveraging. 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 $111.7 billion.
The lack of growth in consumer credit, from mid-2008 to mid-2010, clearly hurt the economic recovery. However, in mid-2008, the US consumer’s balance sheet was in obvious and very urgent need of repair and remains in need of repair. So what is the solution? Ideally, the US needs to see a combination of modest increases in credit (in other words, credit growth that is aligned more closely with the growth in household income, and therefore affordability) coupled with a healthy and sustained increase in private sector employment. This combination would allow for a more robust economic recovery. In that regard the latest tentative increase in consumer credit can be viewed are encouraging. However, the growth in employment (which is far more crucial for a sustained economic recovery) remains fragile and disappointing.
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