Surprise: Consumer Credit Drops in July

Consumer Credit Drops

Source: Reuters

In an economy when little surprises the American consumer these days, a new report by the Federal Reserve reveals that consumer credit dropped in July for the first time in more than a year. Folks continue to reduce their credit card debt – or it’s possible credit card debt is being discharged by credit card companies that are unable to collect on past due balances – either way, it came as a surprise – and worrisome one at that – for Wall Street. Further complicating matters is the uncertainty of the role of student loan debt on those less than ideal numbers. We take a look at all the dynamics in place in an effort to better understand the mindset of the American consumer.

So certain were analysts that Wall Street predicted a $9.1 billion advance. Now, they’re saying the lack of jobs is but one of many culprits behind the disappointment. Despite that $9.1 billion advance, credit instead shrank by more than $3.25 billion.

This news fell behind, at least initially, the other disappointing news that was delivered with it: the unemployment numbers. This, of course, has folks wondering when or if the Fed will be pumping even more money into the economy. Many are saying it could come as early as this week. Either way, the writing is on the wall: Americans aren’t spending their cash and they’re not using their credit cards. Analysts say this trend will continue until American consumers find more confidence in the economy. Not only that, but creditors are once again rethinking their lending policies. Most believed things would be better going into the holiday season. So far, that’s not panned out. The patterns set out during the summer, say economists, will likely continue right on through the holiday season.

Despite an expanding credit sector for the past two years, this July decline is the first drop in more than a year. July’s numbers that include credit cards fell to $4.28 billion. Even the possibility that some consumers are using cash to buy things versus their credit card doesn’t hold much weight when contrasted against every other statistic: food stamps, which are at record numbers with one in five Americans who used food stamps in July; the record national debt that hit the $16 trillion mark last week, the unemployment numbers, the unexpected drop in the construction sector, the upcoming election, and now, as of this morning, the possibility that Moody’s will cut the U.S. credit rating – all of these factors, along with others, show that folks aren’t likely using cash: they probably don’t have it.

Now even the most hopeful analysts are sharing the worrisome trend.

Revolving credit has now declined in three of four months through July,

said one Wall Street economist. That’s not happened in more than a year. It only highlights the weak economy.

The data looks consistent with the lackluster gains in consumer spending reported elsewhere,

said JPMorgan economist David Silver in a memo to the banking giant’s clients. There’s a new data set that federal government is now incorporating into its efforts. Citing more sensitivity to economic trends, this new consumer credit flow report also reveals tough numbers. s — a relatively new data series that the Fed says is more sensitive to economic trends — also cooled. The flow of consumer credit, based on these new dynamics, fell at an annual rate of $39.3 billion in July.

There remains one more wild card: student loan debt. Because the government doesn’t adjust these numbers seasonally, it’ll be awhile before it’s known if these types of loans have had any impact – good or bad – on the sector. That said, it should be noted that student loans increased by nearly 25% in July – compared to the same time frame in 2011. This comes after a thirty percent growth over the past year and a half. It could be that until Congress had voted to keep the interest rates low, students simply weren’t applying. President Obama signed the bill in July that indeed kept rates lower. Time will tell. A more recent report reveals there could be another disturbing trend: college students who take out student loans and then find themselves having to drop out of college to go to work in order to pay those loans that didn’t serve the purpose they intended.

Finally, there could be yet one more explanation: the upcoming holiday season. It’s not uncommon for consumers to rein in spending in late summer and early fall. They’re anticipating the expenses of buying gifts, entertaining family, attending parties and all the other pomp and circumstance of the holiday season. Still, that’s a lot of reining in that would have to occur to result in these kinds of numbers.


About Author

David is a CPA and has spent the past decade as a financial adviser helping clients meet their fiscal objectives. With an appreciation for journalism, he has spent the past few years overseeing several financial columns as well as writing two previous finance blogs. He resides on the East Coast with his wife and two sons and has guided many through the recent recession while providing a no-nonsense approach to spending and saving.

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