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Thursday, July 08, 2010 11:33 PM

Consumption Inflection Point - No One Wants Credit; Consumer Spending Plans Plunge

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Consumer credit has fallen an unprecedented 7 consecutive quarters. Moreover, credit is poised to plunge further as consumer spending plans are falling through the floor.

Bloomberg reports Consumer Credit in U.S. Declined More Than Forecast.

Consumer borrowing in the U.S. dropped in May more than forecast, a sign Americans are less willing to take on debt without an improvement in the labor market.

The $9.1 billion decrease followed a revised $14.9 billion slump in April that was initially estimated as a $1 billion increase, the Federal Reserve reported today in Washington. Economists projected a $2.3 billion drop in the May measure of credit card debt and non-revolving loans, according to a Bloomberg News survey of 34 economists.

Borrowing that’s increased twice since the end of 2008 shows consumer spending, which accounts for about 70 percent of the economy, will be restrained as Americans pay down debt. Banks also continue to restrict lending following the collapse of the housing market, Fed officials said after their policy meeting last month.
Consumer Credit This Recession vs. Last

The above chart courtesy of Chris Puplava at Financial Sense.

Note the remarkable difference in consumer attitudes the latest recession vs. 2001. This drop is unprecedented, at least back to the great depression.

Massive Chargeoffs or Consumers Paying down Debt?

Inquiring minds are asking an important question: Is the drop in consumer credit related to chargeoffs or because consumers are wildly motivated to pay down debt?

For some clues, please consider Credit-card debt drops 10.5% in May
Paying down credit-card debt appears to be on the upswing.

Consumers cut their outstanding revolving debt -– overwhelmingly credit cards -– by an annualized, seasonally adjusted rate of 10.5 percent in May, the Federal Reserve reported Thursday. That’s on the heels of an 11.8 percent drop in April. Revolving credit is a line of credit allowing consumers to pay all or part of an outstanding balance, and, as the balance is paid, it becomes available to spend again as credit.

But it might be premature to say that consumers have been scared straight.

The monthly consumer credit numbers tell only part of the story because it’s not yet known how much debt banks or merchants will charge-off, or remove from their books because they’ve deemed it uncollectable. The Fed’s charge-off numbers are released quarterly, and the first quarter’s 10.1 percent rate tied for the highest since the beginning of 1985, the latest period for which figures are readily available.

“Unfortunately we won’t know until the charge-off data comes out for the second quarter whether the reduction was actually due to consumers paying down their debt or the banks writing bad debt off the books,” Odysseas Papadimitriou, a former Capital One executive who is now founder and chief executive of credit-card research Web site Cardhub.com, said.

In the first quarter, for example, about 40 percent of the decline in credit-card debt was due to charge-offs, Cardhub.com said.
I believe it is safe to say we are seeing both writedowns and chargeoffs. The latter will lead to declining financial earnings unless provisions for losses cover the writeoffs.

I highly doubt loan loss provisions are adequate.

Fed Consumer Credit Release

Inquiring minds are taking a look at the Fed G.18 Consumer Credit Release to see what additional details we can find.

The report shows "Consumer credit decreased at an annual rate of 4-1/2 percent in May 2010. Revolving credit decreased at an annual rate of 10-1/2 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent."

The report also shows the interest rate for 48-month new car loans is 6.26 percent and the interest rate for 24-month personal loans is 11.0%

Those numbers are near all-time lows. So where is the demand?

Consumer Inflection Point

The Contrary Investor is asking Is Consumption About To Hit A Rate of Change Inflection Point?
Is Consumption About To Hit A ROC?...You'll remember that last week we took a look at just how meaningful government support has been to personal consumption in the current headline economic recovery to date through the vehicle of transfer payments, and specifically unemployment benefits. Without the benevolence of those extraordinary benefits headline personal income would be running in negative year over year rate of change territory. Not a happy thought.

As we mentioned last Thursday, at least so far our elected leaders have not extended benefits again, as has been the case for close to two years now. In fact, over the last week over one million folks fell off of the extended unemployment benefit rolls. So right to the point, is personal consumption about to hit a rate of change inflection point as the magnitude of government transfer payments hits its own nominal dollar peak and begins to retreat?

.... So in a bit of quick summation, both the technical action of retail/consumer oriented equities and the actual fundamental numbers from cycles past are strongly suggesting the price out performance run of retail/consumer discretionary is over for the current cycle. It's also in rhythm with classic early cycle beta out performance giving way a year to a year and one half after initial cyclical equity bull runs commence. If government transfer payments have peaked for the current cycle, specifically the nominal dollar magnitude of extended unemployment benefits, the odds increase that perhaps even a trading range of relative performance for retail/consumer discretionary equities is optimistic. If the rate of change in headline personal income numbers exclusive of transfer payments cannot get back into positive territory in a short while and transfer payments lessen meaningfully, retail stocks are at outright risk.

Maybe putting a bit of a tiny exclamation point behind the need of business spending to indeed pick up is data we saw in the consumer confidence report concerning consumer spending plans. We have not updated the following chart in some time, so here it is in all its glory.

As per the report last Tuesday, consumer plans to buy major appliances and autos hit new lows. And yes, as you'd expect post the expiration of the tax credits for home buying, plans to buy homes has retreated. Wildly surprising? Not really. But it does reinforce the message of business spending importance both in 2H 2010 and into 2011.
A tip of the hat to the Contrary Investor for explicit permission for the above snip.

Plans Match Reality

Consumer plans to buy a new home certainly matched reality as last month new home sales plunged 33% to a record low.

For details, please see Inane Thoughts of the Day: CNNMoney Article says "Housing Shortage is Coming"; Coldwell Banker CEO says Now is the "Absolute Best Time" to Buy a Home.

It stands to reason if new home sales are plunging, appliance sales will as well.

Moreover, those plans to purchase new cars looks rather ominous with all the absurd hopes pinned on manufacturing leading the cycle.

Once again, remember this is happening smack in the face of all-time low mortgage loan rates and all-time low new car loan rates.

Consumers just do not want credit at any price. Repeating what I said earlier today in Following Yesterday's Hype of Fastest Growth in 4 Years, June Retail Sales a "Mixed Bag"

If you are properly reading the signs, this is what you see ....

That's All Folks

Image courtesy of clipart for free.

Given the headwinds in this economy, the lack of jobs, the falling consumer confidence numbers, falling new home sales, and falling leading indicators, today may be the last hurrah for retail sales for quite some time.

Mike "Mish" Shedlock
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