Is The Credit Contraction Over?

Headlines on December 7th trumpet the message Consumer Credit in U.S. Increases for Second Month

Credit climbed by $3.38 billion after increasing a revised $1.23 billion in September, the Federal Reserve said today in Washington. Non-revolving loans rose for a third month as federal government education-related lending jumped an unadjusted $31.8 billion.

The report showed credit-card debt fell for a 26th consecutive time, showing Americans continue to pay down debt, one reason spending has been slow to recover. Car sales last month climbed to the highest level in a year and holiday purchases have perked up, indicating households may soon start borrowing again.

Revolving debt, which includes credit cards, dropped by $5.64 billion in October, according to the Fed. Non-revolving debt, which in addition to student borrowing also includes loans for cars and mobile homes, rose by $9.02 billion. The report doesn�t track debt secured by real estate, such as home-equity lines of credit.

Credit Expansion?

Student loans did not used to be classified as consumer credit. Unfortunately, student loans have distorted historical charts so much that many consumer credit comparisons are now useless.

In Breakfast With Dave, Rosenberg asks "Is the Credit Contraction Over?"

What do you know? Outstanding U.S. consumer credit expanded $3.3 billion in October after eking out a $1.3 billion increase in September. This is the first back-to-back gain since just before Hank Paulson took out his bazooka in the summer of 2008.

Does this mean the credit contraction is over? Hell no.

First, the raw not seasonally adjusted data show a $700 million decline. Once again, it was federally-supported credit (ie. student-backed loans) that accounted for all the increase last month ? a record $31.8 billion expansion. Commercial banks, securitized pools and finance companies posted huge declines ? to the point where excluding federal loans, consumer credit plunged $32.5 billion, to the lowest level since November 2004 (not to mention down a record 9% YoY). Over the past three months consumer credit outstanding net of federal student assisted loans has collapsed $76 billion � this degree of contraction is without precedent.

Consumer Credit Minus Federal Loans



Z.1 Flow of Funds

Inquiring minds are digging into today's Flow of Funds release by the Fed. These numbers are through 3rd Quarter 2010.

• Total Domestic Nonfinancial Household Credit: -$232 billion. Down 10 consecutive quarters.
• Home Mortgages: -$255.8 billion. Down 10 consecutive quarters.
• Household Consumer Credit: -$37.0 billion. Down 9 consecutive quarters.
• Domestic Financial Sectors: -$584.9 billion. Down 7 consecutive quarters.

What was up?

• Total Business Credit: +$185.2 billion. Up 1 consecutive quarter.
• State and Local Government: +$124.1 billion. Up 1 consecutive quarter.
• Federal Government: +1395.9 billion. Up countless quarters

Definitions:

• Domestic debt comprises credit market funds borrowed by U.S. entities from both domestic and foreign sources, while foreign debt represents amounts borrowed by foreign financial and nonfinancial entities in U.S. markets only.
• Financial sectors consist of government-sponsored enterprises, agency- and GSE-backed mortgage pools, and private financial institutions.
• Credit market debt consists of debt securities, mortgages, bank loans, commercial paper, consumer credit, U.S. government loans, and other loans and advances; it excludes trade debt, loans for the purpose of carrying securities, and funds raised from equity sources.

Put away those trumpets. Credit, except for government spending is still in net contraction.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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