2.8 C
New York
Saturday, February 24, 2024

Why is US revolving credit decreasing?

Why is US revolving credit decreasing?

Courtesy of Edward Harrison at Credit Writedowns 

Revolving Door

This morning David Rosenberg noted:

We also received the U.S. consumer credit data for April yesterday afternoon and the $1.0bln rise in total outstanding should be viewed in the context of the sharp revision in March (to now show a $5.0bln decline versus the initially reading of a $2.0bln increase). What really caught our eye in the guts of the report was the significant retrenchment in credit card usage. Revolving credit sagged $8.5bln in April and is down an epic $88.8bln in the last 12 months (-9.6%).

Rosenberg goes on to write that household sector demand for mortgages is at a 13-year low. His conclusion is that consumers have discovered frugality in the aftermath of the great noughties asset bubble. Certainly, revolving lines of credit are down.  But the real question is who is doing the cutting – consumers or lenders?

I mention this because Rosenberg later notes that banks are still in deleveraging mode, questioning whether lenders or consumers are responsible:

Whether this is due to a lack of demand (the National Association of Credit Managers index fell in May) or supply, the reality is that banking sector is contracting and once the fiscal largesse is through the system, so will the economy. Banking sector assets contracted at a 10.8% annual rate and the declines were broad based:

  • Residential mortgages fell 10.4% at an annual rate;
  • Home equity loans of credit fell 4.5%;
  • Commercial real estate loans slipped 8.9%; and,
  • Consumer credit slid at a 16.6% pace (with credit cards down an amazing 24.8%).

I say it is more about lenders than consumers.  After all, in the last post I wrote about the psychology of change, saying:

If something works, people keep doing it.  The repetition creates a sense of complacency such that when people are confronted with the initial need to change, they resist. That means people don’t change unless they are forced to do so, making crisis inevitable.

A few thoughts about the euro crisis and the psychology of change

I don’t think consumers are frugal in the least. Debt to GDP levels are not down substantially for households. If consumers were frugal, then why are premium priced non-essentials like iPads selling like hotcakes? Why until last month was the personal savings rate declining as consumption growth outstripped income growth?  Don’t tell me it’s strategic defaults putting money in people’s pockets – if you do the numbers, that’s just too little an effect.

What’s happened is recovery.  People are spending more money again and they are saving less since at least last summer because recovery is at hand.

Now before you start warning me this isn’t a recovery, remember I told you that ‘recovery’ doesn’t mean the economy is firing on all cylinders It just means people are spending more than they did last quarter.

Before the Great Depression in 1929, the U.S. had nominal GDP of $103.6 billion.  By 1933, this had dropped to $56.4 billion due to deflation and a decrease in production.  Over the next four year, GDP growth soared. It was 17.0% in 1934,11.1% in 1935, 14.3% in 1936 and 9.7% in 1937.  That’s some serious growth, right?  Well, GDP was only $91.9 billion in 1937, a full 11.3% lowerthan it had been 8 years earlier. In fact, it wasn’t until 1941 that we attained the nominal production output of 1929.

What this should illustrate is that working from a lower base makes an increase in GDP comparatively easier than when working from a higher base.  Yes, it was a powerful recovery, but it did not get the United States back to the same productive level for many years.

Economic recovery and the perverse math of GDP reporting

And since that’s what is happening right now, I really don’t think consumers are retrenching.

What is happening is that lenders are pulling back revolving credit lines to households and small businesses who are feeling a greater level of distress than large businesses. It is a household a small business credit crunch.  The steep yield curve means banks are essentially getting free money. And the FDIC reports they are indeed making a lot of money (although it is the too-big-to-fails who are doing the money making). Despite this gift from savers and huge bonuses for bankers, banks still aren’t lending or paying dividends because of their capital position. And they aren’t substantially increasing lending anytime soon. That tells me this is as much a supply-side issue as a demand-side.

Bottom line: people don’t change unless they are forced to do so. Americans are as spendthrift as ever. Wait until the economy hits a rough patch – and then we can talk about the demand for credit.

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments

Stay Connected

157,587FansLike
396,312FollowersFollow
2,280SubscribersSubscribe

Latest Articles

0
Would love your thoughts, please comment.x
()
x