September Consumer Credit

Updated 19-Nov-09 19:26 ET

Highlights

As expected, consumer credit fell for the eighth consecutive month. Credit declined $14.8 billion in September, far worse than the consensus forecast of -$10.0 billion. The consumer credit decline for August was revised up to -$9.9 billion from -$12.0 billion.
Broken down, revolving credit lines fell by $9.9 billion while nonrevolving credit declined by $4.9 billion.
There is no new data on commercial bank interest rates.
The interest rates on car loans fell 56 bps to 3.50% as auto financing companies slashed rates to counter lost demand from the end of the Cash for Clunkers stimulus program. The total amount financed per vehicle rose by close to $6,000 as consumers did not have the $4,500 rebate to lessen the costs.

The reason for the decline in consumer credit has not changed. Consumers continue to believe they too highly leveraged and are working to repay their debts. At the same time, banks are worried about possible loan defaults, and in return, they have tightened lending conditions and pulled available credit from even the most credit worthy borrowers.
The data provided by the Fed does not provide a way with determining if the drop in consumer credit was driven more by consumers not wanting additional funds or banks not willing to lend.
Regardless, a drop in consumer credit signals lower aggregate consumer spending in the near term.

Consumers and lenders have been intertwined in a vicious negative feedback loop regarding consumer credit. First, lenders became extremely worried about overleveraged consumers, and they pulled back available funds to even the most credit worthy borrower. Next, the consumer became aware of the tightened lending restrictions and increased their savings rate in an effort to pay off their debts. Lenders noticed a drop in demand for loans and became even wearier of the type of consumer looking for credit in today’s market. The loop continues as consumers push the savings rate even higher. Until lenders relax restrictions on lending, consumers will continue to demand less credit in the future.

Category	SEP	AUG	JUL	JUN	MAY
Total Credit	-$14.8B	-$9.9B	-$19.0B	-$15.5B	-$8.8
Revolving	-$9.9B	-$10.1B	-$2.4B	-$4.9B	-$9.3B
Nonrevolving	-$4.9B	$0.2B	-$16.6B	-$10.7B	$0.5B