U.S. Consumer Credit Fell 5th Straight Month in June
Consumer credit in the U.S. declined in June for a fifth straight month as banks maintained more restrictive lending terms and households remained reluctant to borrow money for major purchases.
Consumer credit fell $10.3 billion, or 4.92 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $5.38 billion in May, more than previously estimated. The series of declines is the longest since 1991.
Stagnant wages and falling home values mean consumer spending, about 70 percent of the economy, will take time to recover even as the recession eases. Incomes fell the most in four years in June as one-time transfer payments from the Obama administration’s stimulus plan dried up, and Americans saved almost $125 billion more of their incomes in June than a year earlier.
“This string of declining credit should continue as long as the economy eliminates workers at an elevated pace,” said Richard Yamarone, director of economic research at Argus Research Corp. in New York. “We’re 20 months into the recession and the economy is still losing a quarter-of-a-million jobs per month.”
Economists had forecast consumer credit would drop $5 billion in June, according to the median of 33 estimates in a Bloomberg News survey. Projections ranged from declines of $11.9 billion to $1 billion. The Fed initially reported that consumer credit decreased by $3.2 billion in May.
Credit Cards
Revolving debt, such as credit cards, fell by $5.25 billion in June, a record 10th straight drop, according to the Fed’s statistics. Non-revolving debt, including auto loans and mobile- home loans, declined by $5.04 billion. The Fed’s report doesn’t cover borrowing secured by real estate.
While the downturn abated in the second quarter as government stimulus programs started to kick in, the three-month period capped the worst retrenchment by consumers since 1980. Gross domestic product shrank at a better-than-forecast 1 percent annual pace after a 6.4 percent drop the prior three months, the Commerce Department figures showed last week.
The economy was forecast to shrink at a 1.5 percent pace, according to the median estimate of 78 economists surveyed by Bloomberg.
Government spending rose at a 5.6 percent pace last quarter, the most since 2003, as President Barack Obama’s $787 billion stimulus program began to take effect. The funds are aimed at helping states retain workers, financing infrastructure projects and reducing tax payments.
Consumer Spending
Consumer spending, meanwhile, fell at a 1.2 percent pace following a 0.6 percent increase in the prior quarter. Purchases slid 2 percent since the peak at the end of 2007 –the most since a 2.4 percent decline in the 1980 recession.
U.S. personal incomes, which include interest income, dividends, rents and other payments as well as wages, tumbled 1.3 percent in June, more than forecast and erasing the previous month’s gain, figures from the Commerce Department showed Aug cheap credit report. 4 in Washington. Spending rose 0.4 percent in June as prices climbed. Adjusted for inflation, purchases fell 0.1 percent, the report showed.
Wages and salaries, which drive recoveries in spending, fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960, the Commerce figures showed.
Decreasing pay is not the only hurdle for consumers. Plunging home prices and stocks reduced household net worth by a record $13.9 trillion from the third quarter of 2007 through this year’s first quarter, according to figures from the Fed.
Job Losses
The pace of U.S. job losses slowed more than forecast last month and the unemployment rate dropped for the first time in more than a year, the Labor Department said today in Washington. Payrolls fell by 247,000, after a 443,000 loss in June, and the jobless rate unexpectedly dropped to 9.4 percent from 9.5 percent, which was the highest in 26 years.
The White House warned the jobless rate is still likely to reach 10 percent, and with companies from Boeing Co. to Verizon Communications Inc. continuing to cut costs, any rebound in hiring may not come until 2010.
“Consumers were still battening down the hatches in June trying to get out from under the mountain of debt that they had accumulated in the good times,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
Default Rates
Credit-card defaults climbed to a record in June as more consumers fell behind on payments because of rising unemployment and bankruptcies, according to Fitch Ratings statistics released on July 31. Charge-offs, the cost of loans that card issuers have given up on collecting, rose to 10.79 percent last month, 64 percent higher than the same period last year, the Fitch Prime Credit Card Index showed.
Fitch said the rate of increase “slowed significantly” from earlier this year, providing “a glimmer of hope that charge-offs may soon plateau” in coming months. Loans delinquent at least 60 days declined to 4.31 percent in June from 4.45 percent in the previous month, Fitch said.
MasterCard Inc., Visa Inc., Capital One Financial Corp., Discover Financial Services and American Express Co. cut marketing by $636.8 million in the latest quarter as rising U.S. unemployment contributed to record defaults and depressed consumer spending.
Sales of cars and light trucks fell to a 9.7 million annual rate in June from a 9.9 million annual rate the month before, according to Woodcliff Lake, New Jersey-based industry research firm Autodata Corp.
In July, sales rose to an 11.3 million pace, the highest since September, Autodata reported this week. That compares with February’s 9.1 million rate, which was the lowest since 1981. Auto sales will likely rebound further as a federal “cash-for- clunkers” program boosts demand for cars.