US consumer credit falls for seventh month running

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US consumer credit has fallen for a seventh consecutive month, suggesting that Americans are paying down debt even as the economy starts to recover.

Consumer credit dropped at an annual rate of 5.8 per cent in August, the Federal Reserve said on Wednesday, slower than the 9.1 per cent rate in July but nevertheless faster than economists were expecting. Most of the drop was in so-called revolving debt such as credit cards, which fell almost $10bn at an annual rate of 13.1 per cent. The previous month it fell just $2.4bn.

“We’ve never seen this aggressive paying down of debt before,” said Ellen Zentner, senior macroeconomist at the Bank of Tokyo-Mitsubishi UFJ. “Once you slap households in the face ... it sticks.”

Most economists believe that it is ultimately necessary for Americans to wean themselves off debt but they expect the process to restrain consumer spending, which typically accounts for two-thirds of US gross domestic product, in the short term.

Some said the underlying trend was probably even stronger than August’s data suggested, because the US government’s short-lived but popular “cash-for-clunkers” car scrappage programme probably spur-red extra demand for “non-revolving” vehicle loans. Outstanding non-revolving debt fell about $2bn in August, much less than in previous months.

Ms Zentner said without the clunkers programme total outstanding debt would probably have fallen almost twice as much. “It just goes to show you that in order to get households to take on more debt, you must have a spectacular incentive programme,” she said.

US households started paying down debt in October last year when the financial crisis intensified and sparked widespread panic. Outstanding consumer credit has dropped every month since then, barring a blip in January, shedding about $112bn to $2,462bn.

Over that time, households’ debt to disposable income ratio has come down from a peak of 133 per cent in 2007 to about 120 per cent. But most expect consumers to continue to delever, especially in light of the job market in which unemployment is nearing 10 per cent and hours and wages are anaemic.

There are also signs that tight supply of credit is contributing to the drop. Banks have slashed credit lines to about one in five borrowers, according to Fico, the credit scorer, and some rates have been increased. “It’s getting pretty darn expensive to get credit as a consumer right now,” said Yasmine Kamaruddin, economic analyst at Wells Fargo.

Many in the industry said banks’ recent moves on credit cards anticipated the credit card bill due to take effect next year, which would restrict their ability to raise rates for risky customers. “One of the results of the credit card bill is that everyone will have to get accustomed to lower credit limits, higher interest rates and higher fees. That is going to be the ‘new normal’,” said Greg McBride, at Bankrate.com.

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