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Consumer credit fell more than anticipated in February. Total consumer credit dropped by a total of $11.5 billion down to $2.45 trillion, a 5.6 percent decline. It was the biggest tumble in three months, since the record $17.5 billion drop in November, according to the Fed.
Consumer credit is a measure of total outstanding debt on all types of consumer loans with the exception of mortgages, and it is considered an important indicator of consumer confidence. The February drop in consumer credit marked the 12th consecutive decline in 13 months. Interestingly, even as outstanding consumer credit has declined, consumer spending has risen for five straight months, and even increased by 0.3 percent in February.
The drop in consumer credit was largely driven by a considerable decline in revolving credit, which is mostly made up of credit card debt. Revolving credit fell by $9.4 billion in February—a possible indication that consumers are paring down credit card debt. Non-revolving credit (car loans and other types of non-credit card consumer loans), in contrast, has slumped only 1 percent over the past year. Revolving credit has steadily descended for several months now, although we have not seen a repeat of the record drop in revolving credit reported in November, when outstanding credit card balances plummeted by 18.5 percent, or $13.7 billion.
Traditionally, the decline in consumer credit is interpreted as a sign that consumers are scaling back debt loads in the face of the continuing weak economy and high unemployment rates. A large decline in consumer credit usage could mean the economy may not be turning around as quickly as economists had hoped.
However, while the drop in consumer revolving credit might indicate that consumers in particular are reining in credit card spending and paying down credit card debt; the picture is not that simple. Credit card companies continue to write off bad credit card loans in record numbers, and while credit card charge-offs show some signs of improvements, average credit card defaults still hover close to an annualized 10 cents per dollar across the industry. In addition, card issuers continue to scale back credit limits, giving consumers less credit to work with, possibly also influencing consumer spending and credit card usage.
Still, there are other indications that consumers are indeed cutting back on credit card usage, and more are paying off their credit cards in full each month as well. While over the long term this will help put American consumers back on stronger footing, it is not the best thing for the economy in its current weak state. Consumer spending drives 70 percent of the U.S. economy, and a pullback in consumer spending could make it difficult for the economy to stage a rebound.
Consumer confidence is expected to be restored as the job market begins to improve. While some states showed early signs of recovery in March, almost half of all U.S. states were still struggling with rising unemployment rates in March, according to the Labor Department’s monthly report. Still unemployment rates may be leveling out. The national unemployment rate has stayed steady at 9.7 percent for three months in a row, and job growth has resumed, with 162,000 new jobs created in March. Consumer spending is predicted to rise an average of 2.25 percent throughout the first six months of 2010.
