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.
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.
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.
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.