Consumer Credit in June 2010 – Contraction Continues

August 6, 2010 · Posted in General Economics · 2 Comments

Consumer credit

Since the peak that I called in December 08, consumer credit has now contracted and Americans have reduced their consumer credit balances by a total of $160 billion or $1,400 per household. That just goes to show you: It still is a loooong way down from Peak Credit and there is nothing that will stop this contraction.

Attitudes have changed a while back already. Only few people understood it. Now more and more are waking up to it. A general fatigue has set in as people realize that the government’s attempts to stimulate us out of this trough have done nothing to bring about a recovery, nothing to get people back to work, nothing to get us out of debt, and in fact everything to prolong the agony, keep unemployment high for years and years to come, and get us in more debt than ever before.

This, my friends, is The End of Consumerism in action and nothing will stop it.

Tags: consumer credit

Consumer Credit July 2009 – 7th Monthly Contraction Straight

September 8, 2009 · Posted in General Economics · Comment

The unprecedented contraction in consumer credit continues to run its course. Since I called the peak in consumer credit in December, it has to date imploded by $134.5 billion. In July 2009, total consumer credit outstanding contracted by another $17.9 billion to now $2.457 trillion from $2.475 trillion in June.

Tags: consumer credit

Federal Reserve Continues to Push on a String

August 17, 2009 · Posted in General Economics · 1 Comment

The AP noted today that With credit tight, Fed extends consumer loan plan:

With banks limiting the availability of auto, student and other consumer loans, the Federal Reserve said Monday it would extend a program intended to help spur more lending at low rates.

The program is set up to provide up to $1 trillion in low-cost financing to investors to buy securities backed by consumer and commercial loans. But private economists said the program, Term Asset-Backed Securities Loan Facility, or TALF, has so far provided little benefit for consumers and businesses still struggling to get credit.

The program, originally set to expire at the end of the year, has two parts.

The part aimed at boosting consumer and business lending is being extended through March. The part geared toward boosting new commercial real estate lending will run through June, because of the extra time typically needed to complete such deals. Delinquency rates on such loans have soared as companies have downsized or closed their doors, the Fed has said.

TALF was created in March, part of the efforts by the Fed and the Obama administration to ease credit, stabilize the financial system and fight the recession. Under the program, the Fed allows for low-rate financing for investors to buy securities backed by credit card debt, auto loans, student loans and loans to small businesses. The market for such loans essentially froze up last fall with the eruption of the worst financial crisis since the Great Depression.

The program has the potential to generate up to $1 trillion in lending, according to the government. But participation has been scant: As of Aug. 12, the value of loans outstanding stood at just $29.6 billion.

To get an idea of how successful the Fed’s program to bring back consumer lending has been, please consider the latest update on consumer credit:

In June 2009 total consumer credit volume dropped to $2.48 trillion. It fell by $17.2 billion (0.7%) from May 2009 and a total of $110.5 billion (4.3%) since its peak in December 2008; an ongoing corollary of deflation, overall contraction, and ending consumerism.

It is important to understand what is so misguided about these ideas. We hear it again and again, how the Fed will continue to push for more credit, borrowing, lending, consumption, etc. Rarely ever do we hear the question asked “Do people want any more debt?”. The simple answer: No. People are sick and tired of debt. The Fed can try as much as it wants, it won’t be able to force lending. When people have had enough they have had enough.

Since this causality is not intuitive for everyone to understand, Robert Prechter came up with a neat example that explains the concept a little better, I already posted it before:

Jaguar Inflation

I am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject so let’s try one.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible. To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing it with tax money. To everyone’s delight , it offers these luxury cars for sale at 50 percent off the old price. People flock to the showrooms and buy. Later, sales slow down, so the government cuts the price in half again. More people rush in and buy. Sales again slow, so it lowers the price to $900 each. People return to the stores and buy two or three, or half a dozen. Why not? Look how cheap they are! Buyers give Jaguars to their kids and park an extra one on the lawn. Finally, the country is awash in Jaguars. Alas, sales slow again, and the government panics. It must move more Jaguars, or, according to its theory – ironically now made fact – the economy will recede. People are working three days a week just to pay their taxes so the government can keep producing more Jaguars. If Jaguars stop moving the economy will stop. So the government begins giving Jaguars away. A few more cars move out of the showrooms, but then it ends. Nobody wants any more Jaguars. They don’t care if they’re free. They can’t find a use for them. Production of Jaguars ceases. It takes years to work through the overhanging supply of Jaguars. Tax collections collapse, the factories close, and unemployment soars. The economy is wrecked. People can’t afford to buy gasoline , so many of the Jaguars rust away to worthlessness. The number of Jaguars – at best – returns to the level it was before the program began.

The same thing can happen with credit.
It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing credit and providing it to as many people as possible. To facilitate that goal, it begins operating credit production plants all over the country, called Federal Reserve Banks. To everyone’s delight , the banks offer the credit for sale at below market rates. People flock to the banks and buy. Later, sales slow down, so the banks cut the price again. More people rush in and buy. Sales again slow, so it lowers the price to 1 percent. People return to the banks and buy even more credit. Why not? Look how cheap it is! Borrowers use credit to buy houses, boats and an extra Jaguar to park out on the lawn. Finally, the country is awash in credit. Alas, sales slow again, and the banks panic. They must move more credit, or, according to its theory – ironically now made fact – the economy will recede. People are working three days a week just to pay the interest on their debt so the banks can keep offering more credit. If credit stops moving the economy will stop. So they start giving credit away at zero percent interest. A few more loans move through the tellers’ windows, but then it ends. Nobody wants any more credit. They don’t care if they’re free. They can’t find a use for it. Production of credit ceases. It takes years to work through the overhanging supply of credit. Interest payments collapse, banks close, and unemployment soars. The economy is wrecked. People can’t afford to pay interest on their debts , so many bonds deteriorate away to worthlessness. The value of credit – at best – returns to the level it was before the program began.

This is exactly the situation we have in the US. People took on way more credit than they could ever pay off. They have over borrowed, over spent, over consumed. The contraction we see now is the deflationary payback for years of unprecedented profligacy. When people have had enough of something, they’ve had enough. Jaguars? Anyone?

Tags: consumer credit, credit, federal reserve bank, talf

Consumer Credit – June 2009 – 6th Monthly Contraction Straight

August 10, 2009 · Posted in General Economics · Comment

In June 2009 total consumer credit volume dropped to $2.48 trillion. It fell by $17.2 billion (0.7%) from May 2009 and a total of $110.5 billion (4.3%) since its peak in December 2008; an ongoing corollary of deflation, overall contraction, and ending consumerism.

Tags: consumer credit, june 2009

Consumer Credit – July 2009 Release

July 8, 2009 · Posted in General Economics · Comment

Click on image to enlarge.

In May 2009 total consumer credit fell by $3.4 billion from 1 month prior. It has now fallen five months straight, by a total of $93 billion since its peak in December 08.

Tags: consumer credit, july 2009

US Vacancies & Consumer Credit Delinquencies at Record Highs

July 8, 2009 · Posted in General Economics · Comment

Reuters writes U.S. consumers fall behind on loans at record pace:

Soaring U.S. unemployment and a shrinking economy drove delinquencies on credit card debt and home equity loans to all-time highs in the first quarter as a record number of cash-strapped consumers fell behind on their bills.

Delinquencies on the value of all card debt soared to a record 6.60 percent from 5.52 percent in the fourth quarter as more cardholders relied on plastic to meet day-to-day expenses, the American Bankers Association said.

Late payments on home equity loans rose to 3.52 percent from 3.03 percent, and on home equity lines of credit climbed to 1.89 percent from 1.46 percent.

A broader gauge showing late payments on eight categories of loans rose for a fourth straight quarter to a new record, edging up to 3.23 percent from 3.22 percent. That rate actually understates consumer pain because it excludes credit cards. The ABA tracks loan payments that are at least 30 days late.

“The biggest driver is job losses,” ABA Chief Economist James Chessen said in an interview. “When people lose their jobs or work fewer hours, it makes it that much harder to meet their obligations. Unfortunately, we’re going to see higher job losses in the next year, and I expect elevated delinquencies.”

The ABA represents most large U.S. banks and credit card companies. Tuesday’s data are a bad sign for them as they prepare to report second-quarter results starting next week.

While improved capital markets may boost the bottom lines of some, analysts expect lenders such as Bank of America Corp, JPMorgan Chase & Co, Citigroup Inc, Capital One Financial Corp and American Express Co to suffer higher credit losses, especially in cards.

…and U.S. apartment vacancies near historic high:

The vacancy rate for U.S. apartments reached its highest level in more than 20 years in the second quarter and could soon exceed record highs if the recession persists, real estate research firm Reis Inc said.

The national vacancy rate rose to 7.5 percent, the highest since 1987 and an increase of 1.4 percentage points from last year, according to a report Reis released on Wednesday. The record high was 7.8 percent in 1986.

“We are reaching that historic high very quickly,” said Victor Calanog, Reis director of research.

The second-quarter vacancy rate was 0.20 percentage point higher than the prior quarter and up from the cyclical low 5.5 percent reached in 2006, Reis said.

The U.S. recession has taken a toll on the U.S. apartment market, which largely relies on employment growth to fuel demand. Its largest tenant group, 18- to 24-year-olds, has been hardest hit by rising unemployment. Meanwhile, the apartment buildings sector has led all commercial real estate categories on loan defaults.

I know a few people who lost their jobs in San Francisco and had to move to other places to find new employment and/or stay with family for a while and look for a new job. The startling effects of this are only just beginning to show in the rental market.

Just an example: A friend of mine who lives in the same complex as I do used to pay $2,600 for a 1 bedroom / 1 bathroom apartment. Now that his lease was up for renewal he checked with the landlord on other options in the same complex. Without the slightest qualm they told him to move into a 2 bedroom / 2 bathroom apartment which is becoming vacant now, for $2,550.

As I already mentioned in January, we have reached the peak. Expect rents to continue to drop sharply in the months and years to come, especially in the insanely overpriced cities San Francisco and New York.

Tags: consumer credit, delinquencies, rents, vacancies

Consumer Credit – June 2009

June 5, 2009 · Posted in General Economics · Comment

Click on image to enlarge.

Total consumer credit outstanding dropped to $2.5 trillion in April of 2009. This is the 4th month straight since the peak in December. It has dropped by a total of $89 billion since then. This goes hand in hand with the end of consumerism and is a harbinger of the coming and ongoing contraction in the production of gonsumer goods in the US. It is the downward side of the consumption business cycle in full swing.

Tags: consumer credit, consumer spending, june 2009

Sick and Tired of Debt

May 14, 2009 · Posted in General Economics · Comment

I have said it many times. The scourge in the US system is not a lack of credit, “tight credit“, “frozen credit”, or whatever else the Bernankes, Geithners, and Obamas would have us believe. Nor do we need to get “credit flowing again”, “consumers borrowing again” or anything remotely close to it.

We need the opposite: Savings. We got to where we are because of too much debt and credit. People over leveraged themselves into bankruptcy, they are sick and tired of debt. Borrowing has plunged and consumer credit will continue to contract precisely for that reason.

Rarely does anyone stop and ask the question: “Do people actually want to borrow any more money?” Of couse they don’t, why in the world should they?

Kelly Evans writes Worries About Economy Weigh on Loan Demand:

Maria O’Brien, a 27-year-old free-lance writer, and her husband are planning to do something later this year that they would have thought crazy in the past: buy a minivan — with cash.

“It’s worth the sacrifice right now to get out of debt,” Mrs. O’Brien said. “It means living more frugally, but also more freely.”

Banks are under fire for not lending enough and for tightening terms of credit, contributing to a drop in U.S. economic activity. But as the O’Brien family illustrates, the loan market’s shrinkage isn’t just about the supply of credit. It is also about weak demand for credit, a byproduct of households and businesses wary about the economy.

I would actually contend that the sole reason for lack of lending is the weak demand for credit. Banks have been flooded with excess reserves:

Meanwhile consumer credit continues to contract.

She goes on to write:

“Lending money is the bread and butter of banking,” said James Chessen, chief economist for the American Bankers Association. “The money is there, but banks are running smack into a wall of poor loan demand.”

The O’Briens, who live in Front Royal, Va., with their three children, are putting aside at least $500 a month toward the purchase of a used minivan in the $6,000-$8,000 range. They are also imagining a debt-free future.

“Once we get rid of it, we’re never going back,” Mrs. O’Brien said.

As consumer spending contracted last year, growth in household borrowing screeched to a halt in the fourth quarter after growing at a 10% annual clip earlier this decade, according to the Federal Reserve.

“We’re in a recession, and it’s one where households came in highly leveraged,” Fed Chairman Ben Bernanke said recently. Combined with firms “cutting back on their investment,” he expects to see weak demand for loans.

Loan demand began to fall sharply toward the end of last year and continued to weaken in the first three months of this year, according to the Fed’s periodic survey of bank senior loan officers. A pick-up in demand for mortgage loans is a notable exception.

In the latest survey, for instance, 18 banks said demand was moderately or substantially weaker than three months earlier, but only nine said it was moderately stronger. On balance, the Fed said, 60% of U.S. banks reported weaker demand for commercial and industrial loans.

The O’Briens have long dreamed of being debt-free. But they began to pay off loans more aggressively after Jeff O’Brien’s construction work dried up last year, leaving them at times without steady income to support mortgage, car, credit-card and student-loan payments. Mrs. O’Brien took on more free-lance work, while her husband transitioned into a career as an insurance adjuster.

In the meantime, they have scrimped and saved to pay down a third of their $30,000 credit-card and student-loan debt and sold Mr. O’Brien’s beloved Ford truck to eliminate that monthly payment. Aside from the mortgages on their two houses — one they live in, and one they rent out — they are planning to be debt-free by next April.

“Once we do that, we’ll tackle the mortgages,” Mrs. O’Brien said.

They aren’t alone. At Arizona Central Credit Union in Phoenix, which has 70,000 members, loan applications plunged last fall as the financial crisis intensified. The credit union saw more than 3,000 loan applications in September, totaling $13.9 million, a “fairly normal” month according to chief lending officer Patty Aker. That dropped to 2,300 applications in October, just over 1,000 applications in November and 900 in December. Loan applications rose slightly in January, then dropped again in February, to 895, totaling just over $4 million.

“We’ve got money to lend, it’s just that people were so nervous about what was going on in the economy,” Ms. Aker said. “So many people had lost jobs or were afraid they’d buy a car and then GM wouldn’t be around anymore to honor their warranties.”

More than two-thirds of Arizona Central’s $285 million loan portfolio are vehicle loans; the rest is comprised of other types of consumer loans and a small amount — about 10% — are small-business loans.

Across town, the National Bank of Arizona, primarily a business lender, is seeing a similar drop in demand. Business applications for new-equipment leases tumbled 28% in the first four months of this year, compared with the same period in 2008. Loan applications from small businesses are down 11.5%.

“Deal flow just came to a screeching halt” late last year, said Brent Cannon, executive vice president at the bank. He added that because many small businesses use their home equity as collateral, woes in the Phoenix real-estate market threaten to keep a lid on demand.

Lending can’t be forced. This is the End of Consumerism in action. Credit expansion only goes on for as long as the people play along. When they’ve had enough, they’ve had enough.

Tags: consumer credit, credit crunch, lending

Consumer Credit – March 2009

May 7, 2009 · Posted in General Economics · Comment

The total consumer credit volume in the US has dropped to $2.53 trillion, a drop of $27.2 billion from February. It has now fallen from its December 08 peak by $64 billion:

Click on image to enlarge.

When looking at the chart above one might think that this might as well be just another ditch like the ones that usually followed December.

But one has to realize that the chart above starts at 2001. From 2001 through 2007 the American attitude was consistently biased toward more and more borrowing and more and more spending.

But these attitudes have changed. The end of consumerism is not just a temporary recessionary ditch. It is a fundamental shift in psychology and attitudes that can carry on for a very long time.

When looking at the long term chart of consumer credit, one gets a better picture of where we can go from here, assuming that this consumer cradit bubble that started in 1993 has burst:

Click image to enlarge.

Simply put: I think the roller coaster has reached the top.

Tags: consumer credit, consumer debt, consumer spending

Consumer Credit February 2009

April 8, 2009 · Posted in General Economics · Comment

Click on image to enlarge.

From January to February 2009 consumer credit outstanding in the US has dropped by $27.5 billion or 1.1%. This is the largest monthly drop since January 1998.

This is just the beginning of a massive unwinding of consumer credit and a corollary of The End of Consumerism.

Tags: consumer credit, consumer debt