July consumer credit falls a record $21.6 billion

WASHINGTON Tue Sep 8, 2009 4:18pm EDT

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WASHINGTON (Reuters) - Total U.S. consumer credit fell by a record $21.6 billion in July, Federal Reserve data showed on Tuesday, the latest hint household spending would be too weak to drive the economy's recovery from recession.

July consumer credit outstanding fell at a 10.4 percent annual rate to $2.47 trillion, steeper than analysts' expectations for a $4.0 billion drop. Total credit in June tumbled $15.5 billion rather than the $10.3 billion drop previously estimated by the U.S. central bank.

"It is one more important sign that consumers are not going to be contributing very much to the economy for the balance of this year and probably for a good part of next year. Consumers will be in the background," said Bernard Baumohl, chief global economist at The Economic Outlook Group in Princeton, New Jersey.

With an unemployment rate of 9.7 percent, the highest in 26 years, and incomes falling, households have drastically cut back on spending. Consumer spending accounts for about two-thirds of U.S. economic activity.

While key reports suggest the economy is probably in the early stages of recovery from a recession that started in December 2007, continuing jobs destruction has raised fears that the healing process will be slow.

Consumer credit has now declined for six consecutive months, the first time this has happened since the period from June 1991 to December 1991, the Fed said.

"There is no way that this recovery can be sustained unless we see a pickup in household spending. The big question out there is will we see Americans spend again to keep this recovery alive," said Baumohl.

The recovery, which many economists believe is underway, will be largely driven by goods restocking, after inventories were slashed to record low levels, government spending and historic low interest rates.

Nonrevolving credit, which includes closed-end loans for big-ticket items like cars, boats, college education and holidays, plunged a record $15.4 billion, or at a 11.7 percent annual rate, to $1.6 trillion.

Revolving credit, made up of credit and charge cards, dropped $6.1 billion, or at 8.1 percent rate, to $905.6 billion, the data showed.

"Credit is still shrinking and that is going to have an impact on consumption. As such, this remains an important part of the recovery since without the smooth functioning of credit markets, the recovery may stall," said Charmaine Buskas, a senior economics strategist at TD Securities in Toronto.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)

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