Consumer Debt Falls Again
The Federal Reserve announced today that consumer debt fell by $17.5 billion for November. When you compare this to the consensus estimate of a $5 billion decline, the drop is staggering. Bloomberg reports that this drop was a record, and marks 10 consecutive declines in consumer credit, the longest series of declines since 1943.
This tremendous decline in consumer credit suggests the consumer is learning how to live on less credit. As a result, savings rates will continue to increase.
As a result of this structural shift in consumer habits, some sectors will continue to feel the effects of declining consumer credit, even as we emerge from the Great Recession. What sectors? Any sector that relies on the consumer’s ability to pull out a credit card will feel the effects of a more frugal consumer.
Household Net Worth Increases; Width of U Decreases
The Federal Reserve announced today that household net worth increased during the second quarter by $2.7 billion. Last year, we saw significant reductions in net worth due to plummeting home and stock values. The increase today is a step in the right direction.
As household net worth is restored, through higher home values and equity markets, the width of the U will shrink. Consumers will regain confidence due to the wealth effect, and resume some spending.
Despite some gains in household net worth, the economy will continue to face headwinds due to the “new normal”. This “new normal” will see a more frugal consumer and a lower reliance in consumer debt.
Unemployment Claims Rise
The Labor Department announced this morning that new claims for unemployment increased to 474,000 for the week ending December 5. The less volatile 4-week moving average declined slightly. Indiana saw claims jump by more than 2,000 due to layoffs in automotive and manufacturing.
New claims are certainly declining, and this trend should continue. In a separate report this week however, Bureau of Labor Statistics reported that new hires and job openings declined slightly. Separations were also down slightly.
Despite the favorable employment report last month, the above simply means that the labor market is going to see a slow rebound, characteristic of a U shape recovery.
It is important for policy makers to recognize that one just does not flip a light switch to create a job. Proper incentives (i.e. profit and reward for risk-taking) and reduced uncertainly can certainly make a difference.
EIO (Economic Indicator by Observation)
The parking lot of a New Albany department store (sounds like coals) is full compared to same time last year. Are people browsing, chasing discounted items, or spending like there is no tomorrow? We’ll learn after retail sales numbers are released.
EIL (Economic Indicators by Listening)
Just got a haircut, and overheard a conversation in the next booth. Customer says he is out of work since June, and has applied all over Kentucky and Indiana, and no offers. Hairdresser says they’ve cut back. Customer says he and his wife have done things that they’ve never gotten around to, like cutting their land phone line. Customer says he will go back to school, and probably work on his Master’s degree.
Credit Cards and the US Postal Service
Interesting statistic in this morning’s Wall Street Journal (Lending Squeeze Drags On),
“In 2005, over six billion credit-card offers flooded consumers’ mailboxes. This year just 1.4 billion have been sent out, according to Synovate, a market-research firm.”
Consumer Debt Keeps Going Down Down Down
Well, the Federal Reserve reported today that consumer debt levels continued to decline. The decline was not as deep as expected, another sign of the recovery.
Consumers will continue to delever and clean up household balance sheets. The supply of credit might be available, but consumer intolerance of this credit will continue to place downward pressures on debt levels.
Shrinking consumer debt is another sign pointing to this “new normal”.
Expect to see mild consumer spending, and a sustained frugal consumer. 70% of the nation’s economy is traced to the consumer. So this new consumer behaviour will impact the strength of the recovery.
