In July 2010, US consumer credit fell by a further $3.6bn. This was below market expectations for a contraction of $4.7bn. The previous month’s data was revised from an initial decrease of $1.3bn to a decline of $1.0bn. US consumer credit (which excludes mortgage finance) has fallen in 21 of the last 24 months. Prior to January 2009, US consumer credit rose consecutively each month for 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 $2.419 trillion, which is an amazing $163 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 July 2010, non-revolving credit rose by $0.7 billion, while revolving credit declined by $4.4 billion.
Since the middle of 2008 the US consumer has been trying to de-leverage. This has been reflected in a dramatic fall-off in mortgage advances during 2008 to 2010, but also in a sharp decline in consumer credit. This decline in household debt (both mortgage debt and consumer credit) has been very unusual relative to the history of household debt. For example, over the years from 1999 to 2008, US consumer credit rose by a total of $7.9 trillion or at an average of $202 billion a quarter. In contrast, during the past 18 months, US household debt has fallen by a net $788 billion or at an average of $131bn a quarter.
The ratio of US household debt to disposable income was last recorded at 125.9% (Q1 2010), following a peak at 135.9% in Q1 2008. Updated information on debt/income should be available on 17 September 2010. The debt servicing ratio has also declined, and was last recorded at 12.46% of disposable income, which is still relatively high but well below the peak of 13.96% recorded in Q1 2008. The US consumer has clearly been repairing their balance sheet. This is best reflected in the rise in household wealth and higher personal savings.
Obviously, the lack of growth in household debt, while prudent under current circumstances hurts the economic recovery, at least in the very short-term. Given that the US consumer remains highly indebted, with still relatively 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. Ideally, the US needs to see a combination of modest increases in credit coupled with a healthy and sustained increase in private sector employment.
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