Consumer Credit Falls, Again

Consumer borrowing fell for the fourth month in a row in May. This is one of the most significant indicators of a healthy economy: when consumers feel comfortable about their economic situation, they are confident enough to borrow money. This is one of the major drivers of consumer consumption.

At The Daily Capitalist, I have been emphasizing the significance of what I feel is a major shift in consumer sentiment. The reasons are not so much due to the current data, which is bearing out my theory, but, rather, long-term trends that encourage the biggest spenders, the Boomers, to curtail spending and increase saving. Most spending, obviously, comes from the wealthier sectors of the economy, and no demographic group has more money than Boomers (expect their parents who aren’t spending as much any more or whose numbers are declining). Boomers are cutting back on expenses and are saving more in order to pay down debt and fund retirement. And their biggest ATM, their homes, are still declining in price. I think the culture of consumption has changed for them. And that doesn’t look good for the economy in the short- or long-term.

Consumer credit contracted a sharp $9.1 billion in May with April revised to show an even more severe $14.9 billion contraction. The April revision is very surprising given the initial reading of a $1.0 billion gain!

Revolving credit contracted $7.4 billion in May and contracted $8.3 billion in April. Non-revolving credit shows a $1.8 billion contraction in May on top of a $6.5 billion contraction in April. Neither category is likely to show much improvement in June given indications from today’s soft store sales report and last week’s soft unit vehicle sales.

Consumer credit had been leveling earlier this year but now appears to be on a double dip. This report could set stocks in reverse during the last hour of trading.

Consumer credit outstanding edged up $1.0 billion in April-the first increase in three months. However, the original estimate for March of a $2.0 billion rise was revised downward by $7.4 billion and now shows a $5.4 billion contraction. For the latest month, non-revolving credit, reflecting strong car sales, jumped $9.4 billion in April but was offset by a nearly as large of a fall in revolving credit.

See stories from the Wall Street Journal and Bloomberg.