CONSUMER BORROWING DECLINES, On Heels of Faltering Economy, Rising Unemployment!
OUTSTANDING CONSUMER CREDIT FALLS 1.6% IN OCTOBER, COUNTERING SEPTEMBER, 2008 GAINS!
Fear over potential loss of their jobs and their rising debt levels may have been the impetus for American Consumers to curtail their borrowing in October, according to the most-current Federal Reserve Report on Consumer Credit. Outstanding credit held by consumers dropped $3.5 Billion in October, to $2.578 Trillion.
In prior months, Consumer Outstanding Credit actually rose in September by $6.7 Billion, after an August decline of $6.4 Billion.
It appears obvious that consumers have cut their spending dramatically. The latest Gross Domestic Product (GDP) figures indicate that consumer spending fell by the highest rate in 28 years during the Third Quarter, 2008. The GDP provides a broad measure of economic activity across the U.S.. Experts predict the 0.5% GDP dip during the Third Quarter will be eclipsed during the Fourth Quarter, 2008.
After months of denial and spin, the Bush Administration finally agrees with the National Bureau of Economic Research that we are indeed in a Recession - technically defined as two consecutive quarters with negative GDP growth.
Non-farm payroll numbers, released by the U.S. Labor Department on Friday, give credence to American's job-loss fears. The Labor Department estimates the economy lost 533,000 jobs during the Third Quarter, 2008 - the largest decline in 28 years. Such figures spread fear, and fear often chills spending, on everything from consumer products, to durable goods, to homes.
After years of heavy spending, thousands now have strangling debt. Fed data shows more families are saving, but average family assets have shrunk with the retreating stock market. Declining home values in many markets have eroded home equity, and the ability of many to draw equity out of their homes to handle emergency and optional family expenses.
Further, with many homeowners "under water", owing more on their homes than they are worth, and with mortgage delinquency skyrocketing, lenders have considerably tightened their underwriting standards, further restricting the flow of mortgage and other consumer credit.
Although Fed Consumer Credit Estimates omit real estate secured loans and mortgages, two other types of consumer credit provide a clear indication of how consumer behavior, is changing.
Revolving Debt - mainly credit card financing - slipped by $181.6 Million in October, to a revised total of $976.1 Billion. In September, the revolving debt figure rose to $2.5 Billion. Many have used their Credit Card Lines to pay ordinary household expenses.
Non-Revolving Debt - for the most part, auto loans - decreased 2.5% in October, to $1.602 Trillion - down $3.4 Billion. This counters the 3.2% increase in September. Consumers, afraid of incurring new, high-value debt, are hanging on to their old cars, rather than trading for new, financed vehicles. Also, recent credit tightening has prevented many potential auto buyers with average credit from buying or leasing a new car now.
For more, read Jeff Bater's post in the Real Time Economics Blog via The Wall Street Journal, on December 5th.
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