Consumer credit dives for 7th month

[Watchman]

Consumer credit dives for 7th month
Total borrowing slides by $12 billion as unemployment rises and consumers limit spending.

NEW YORK (CNNMoney.com) -- Consumer credit pulled back for the seventh straight month in August, led by a steep decline in credit card usage, a government report said Wednesday, as unemployment soared and cash-strapped consumers continued to limit spending.

The total amount of credit outstanding fell by $12 billion, or 5.8%, to $2.463 trillion in August, according to the Federal Reserve.

Economists predicted total borrowing would dwindle by $10 billion in August, according to a consensus survey from Briefing.com.

"Credit is being squeezed on both sides," said economist Sean Maher of Moody's Economy.com, adding that lending standards at banks remain tight and consumers are pulling back on their debt.

The last time consumer credit contracted for seven months in a row was in 1991. It has never dropped eight months in a row since the Federal Reserve started tracking it in 1943.

The last time consumer credit contract for seven months in a row was 1991, when it decreased by $9.8 billion, or 1.2%. This year, credit has plunged by more than $100 billion, or nearly 3.8%.

Revolving credit, which includes credit card debt, tumbled $9.9 billion to $899.4 billion. That's a 13.1% decrease from the previous year.

Nonrevolving credit, which includes auto and student loans, fell by $2.1 billion, or 1.6%, to $1.563 trillion.

"I was a little surprised that nonrevolving balances didn't increase slightly due to the surge of vehicle sales driven by the Cash for Clunkers program," said Maher, who expects the rise to show up in September's report.

"But at the same time, unemployment is rising and people are weary of using credit cards as a stopgap measure," Maher said. "If they don't think they can find another job quickly, they won't run up a debt burden and pay interest on it."
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The nation's unemployment rate spiked to 9.8%, a 26-year high, in August as employers cut 263,000 in the month. Former Federal Reserve chairman Alan Greenspan is among those who expect the rate to cross the 10% mark.

Since January 2008, 7.2 million jobs have been lost in the recession, making consumers less likely to take on new debt.

While declining consumer credit delays economic recovery in the near term, Maher said it's ultimately a positive development because consumer debt levels were too high and the savings rate was too low. A reversal over the next several quarters will improve consumer credit quality and prevent a longer term problem, he added. To top of page