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Fed Report: Consumer Credit Takes Record Tumble
By Eva Norlyk Smith, Ph.D.
U.S. consumer credit dropped $17.5 billion in November, the Fed said in a report released Friday. The record drop took economists by surprise; most had predicted a $5-6 billion drop, in line with the $4.2 billion drop in October. The decline marks the 10th straight monthly decline in a row, the longest since the Fed began tracking the data in 1943, according to the Associated Press.
The largest drop was in revolving credit, largely a measure of credit card balances, which plummeted by 18.5 percent or $13.7 billion to $874 billion in November. Non- revolving credit, which includes auto loans and mobile home loans, dropped by $3.8 billion. The consumer credit numbers do not include mortgages on residential real estate.
The large decline in revolving credit comes on the background on record unemployment numbers. The unemployment rate hovers close to a 26-year high, with 7.2 million jobs lost since the onset of the recession; the economy lost 4.2 million jobs in 2009 alone.
The drop in revolving consumer credit is brought about by numerous factors. Firstly, credit card companies are facing record charge-offs, writing off credit card debt to the tune of an annualized 10 cents per dollar across the industry. Secondly, in the face of record defaults and a continuing weak economy, card issuers have been tightening lending terms and scaling back credit limits, giving consumers less credit to work with.
Analysts in the Wall Street Journal earlier this year predicted that financial institutions would scale back credit card lines by as much as $2 trillion in 2009 and $2.7 trillion by the end of 2010. If these numbers bear out, it would shrink total available credit card lines available to consumers by more than half. This, in turn, might influence consumer confidence and thereby consumer spending and credit card usage.
And this, according to analysts is the most worrisome part of the record drop in revolving consumer credit. It is an indication that consumers continue to scale back on their spending, in the face of high unemployment rates, a continuing weak economy, and dwindling credit limits. With consumer spending driving 70 percent of the U.S. economy, most analysts fear that if the trend continues, it could make it difficult for the economy to stage a rebound.