The U.S. consumer continues to try to improve his or her balance sheet. In February, consumer credit (not including real estate-backed loans, aka mortgages) fell by 11.5%, and has been down in 12 of the last 13 months.
However the one exception to that was in January, and the amount of consumer credit for that month was revised upwards to an increase of 10.6 billion from the initial report of a $5.0 billion increase. For February, the decline is equal to an annualized decline rate of 5.5%.
Year over year, consumer credit is down 4.0% and it is off 5.2% from its peak in July 2008.
There are two parts of consumer credit: revolving credit like credit card debt, and non-revolving debt like auto loans. It was the credit card debt that really fell in February, falling at an annual rate of 13%. Non-revolving debt also declined, but at a much more modest 1.5% annual rate.
This would indicate that the size of the outstanding balances for the big credit card-oriented banks like Capital One (COF), American Express (AXP) and JPMorgan (JPM) are probably falling. In general, those loans carry very high interest rates and tend to be very profitable for the banks.
Falling consumer credit is a very unusual occurrence, particularly falling at significant rates. The graph below (from http://www.calculatedriskblog.com/) shows just how deep this decline has been relative to all other downturns.
The report does not break down how much of the decline is due to people paying back the debt they owe, and how much is due to people defaulting on the debt. With personal bankruptcies rising to the highest levels since the draconian new bankruptcy law was put into pace in 2005, the defaults are no longer just an asterisk or a rounding error.
Over the long term, it is a good thing that people are getting their credit card balances under control. On the other hand, in the short term it shows less willingness to spend, which tends to slow the down the economy.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
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