U.S. Consumer Credit Falls by a Record $21.6 Billion

U.S. Consumer Credit Falls by a Record $21.6 Billion

Sept. 8 (Bloomberg) -- U.S. consumer credit plunged more than five times as much as forecast in July as banks restricted lending terms and job losses made Americans reluctant to borrow.

Consumer credit fell by a record $21.6 billion, or 10 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released in Washington. Credit dropped by $15.5 billion in June, more than previously estimated. Credit fell for a sixth month, the longest series of declines since 1991.

The credit crunch, stagnant incomes and declines in household wealth are casting doubt on the strength of the economic recovery. The arrival of the government’s “cash for clunkers” program in late July wasn’t enough to keep credit that covers car loans from plummeting by a record amount, as consumers delayed other purchases.

“Lenders are restricting access to credit because risk has increased and that is intersecting with households reducing their leverage,” said Richard DeKaser, chief economist at Woodley Park Research in Washington, whose forecast of a decline of $12 billion was the most pessimistic among economists surveyed. “Cash-for-clunkers is to some extent shifting demand from one place to another, not creating it.”

Economists had forecast consumer credit would drop $4 billion in July, according to the median of 31 estimates in a Bloomberg News survey. Projections ranged from declines of $12 billion to no change from the previous month. The Fed initially said consumer credit decreased by $10.3 billion in June.

Credit Cards

Revolving debt, such as credit cards, fell by $6.1 billion in July, the Fed report showed. Non-revolving debt, including loans for automobiles and mobile homes, plunged by $15.4 billion. The Fed’s report doesn’t cover borrowing secured by real estate.

Consumer spending rose 0.2 percent in July, following a 0.6 percent increase in June, government data showed on Aug. 28. Excluding cars, purchases were little changed.

Incomes were unchanged in July after dropping 1.1 percent in the prior month. The decrease in income in June reflected the fading boost from government stimulus-related tax cuts and transfers. Wages and salaries posted the first gain of the year in July, increasing 0.1 percent after dropping 0.3 percent.

Tighter Standards

Plunging home values and stock prices have fueled a record $13.9 trillion loss in household wealth in the U.S. since the middle of 2007.

U.S. banks tightened standards on all types of loans in the second quarter and said they expect to maintain strict criteria on lending until at least the second half of 2010, a Federal Reserve report showed on Aug. 17.

Most banks cited reduced risk tolerance and “a more uncertain economic outlook” as the main reasons for restricting credit to businesses, with 35.2 percent saying they “tightened somewhat,” the Fed said in its quarterly Senior Loan Officer survey.

Since the survey, economists have raised their outlook for economic growth as data suggested home sales and manufacturing were stabilizing, and the Fed has said that the economy is “leveling out.”

Jobless Rate

A Labor Department report last week showed payrolls in August fell the least in a year. At the same time, the jobless rate rose to the highest in 26 years, a reminder that hiring will take longer to rebound, restraining consumer spending.

The economy has lost 6.9 million jobs since the recession began in December 2007, the biggest drop in any post-World War II economic downturn.

Credit-card defaults fell in July after breaking records for five straight months, according to Fitch Ratings statistics released on Aug. 31. Charge-offs, the cost of loans that card issuers have given up on collecting, fell to 10.55 percent as consumer credit quality showed “signs of life,” Fitch said.

Defaults are less likely to rise in the fourth quarter, as they typically do, as delinquencies stabilize and monthly payment rates improve, according to Fitch.

“The economic situation may have caused some front- loading of losses this year,” analyst Cynthia Ullrich said Aug. 31 in a statement accompanying the release of Fitch’s Prime Credit Card Charge-off Index.

Sales of cars and light trucks rose to an 11.3 million annual pace in July, according to Woodcliff Lake, New Jersey- based industry research firm Autodata Corp, in part because of the government’s trade-in incentive program. Sales increased again in August to a 14.1 million annual pace, the highest since May 2008. That compares with February’s 9.1 million rate, which was the lowest since 1981.

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