Friday, January 8, 2010

Consumer Credit in U.S. Drops Record $17.5 Billion

Interesting headline out today showing this massive drop in consumer credit during November.  Here's the story (via Bloomberg):

Consumer credit in the U.S. dropped a record $17.5 billion in November as unemployment close to a 26- year high discouraged borrowing and banks limited access to loans.

The slump in credit to $2.46 trillion was more than anticipated and followed a revised $4.2 billion drop in October, Federal Reserve figures showed today in Washington. The median estimate of economists surveyed by Bloomberg News projected a decrease of $5 billion. The series of 10 straight declines was the longest since record-keeping began in 1943.

A labor market that’s shed 7.2 million jobs since the recession started in December 2007 is restraining consumer spending that accounts for about 70 percent of the economy. Fed policy makers have said tighter bank lending standards and reductions in credit lines are hampering the recovery.

“Double-digit unemployment is eroding consumer confidence and the uncertainty is prompting consumers to pay down their credit card debts,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “We have not seen such a wholesale reduction in consumer credit since the last time we had double-digit unemployment rate following the early ‘80s recessions.”

Stocks were mixed and Treasury two-year notes gained the most in three weeks after the Labor Department said earlier that companies reduced payrolls in December by 85,000 workers after adding 4,000 a month earlier. The unemployment rate held at 10 percent last month.

With an economy so dependent on the health of the consumer, figures like this are a little disturbing.  Consumers are obviously still de-leveraging, and savings rates are growing.  Meanwhile corporations still aren't hiring at increased levels (as evidenced by today's report).  This will all factor into just how robust the recovery is, and how soon it will come.  There has been evidence of strength returning, but the consumer is still in rough shape.  It's also important not to get too wrapped up in stories like this as the market still appears to have momentum.

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