U.S. consumer credit falls again, sending the global economy a message

Just call it "the sound of no cards swiping." Americans are keeping their credit cards in their wallets.

Balances on U.S. consumer credit cards in August fell at a 5.8 percent annual rate, or by $11.98 billion, the U.S. Federal Reserve announced Wednesday. It was the seventh consecutive monthly decline in consumer credit -- a pattern that's consistent with both the frugal-consumer trend in the U.S. and banks' decisions to lower, or in some cases eliminate, credit lines in the wake of the financial crisis.
Economists surveyed by Bloomberg News had expected August card use to contract by $8.5 billion. Revised figures for July showed consumer credit plunged a bit less, by $19 billion, than the originally reported $21.6 billion. In August, total outstanding consumer credit, including revolving and nonrevolving credit, declined at a 5.8% annual rate, or by $11.98 billion, to a seasonally adjusted $2.46 trillion, the Fed said.

The month's revolving credit, which includes most credit cards, declined by $9.91 billion, or by 13.1% annually, to $899.4 billion. Nonrevolving credit, which includes auto loans and personal loans, decreased $2.1 billion, or by 1.6 percent, to $1.56 trillion.

Investors should follow the Fed's monthly consumer credit report because it provides perhaps the most comprehensive view of consumer credit -- which in recent decades has represented the primary payment form for consumer transactions, particularly big-ticket items. Further, since the start of the financial crisis, the report has taken on increased importance because it provides clues about how the Fed's effort to normalize credit extension is faring after the banks got so skittish about lending.

Also, while paying down consumer debt -- particularly excessive debt -- is a good thing, the very fact of Americans getting their budgets in order will present another hurdle for the U.S. economic recovery.

That's because in addition to cutting debt, the U.S. economy needs at least selected consumers to spend in order to stimulate the economy. But simultaneously saving more while buying at a robust rate is a dilemma. There's scant economic theory to suggest a nation can successfully pull that trick off. If PIMCO Global Strategic Advisor Richard Clarida's analysis is correct, the "new normal" is a U.S. GDP growth rate in the recovery stage of about 2 percent -- far below the 5 percent to 7 percent rate the U.S. typically registers early in a recovery.

Economic Analysis: Without question, Americans remain in belt-tightening mode, something you'd expect during a recession, but this cycle's pronounced slump, with its large job losses and accompanying financial crisis, has taken economizing to levels not seen in decades. While Americans are bringing their debt down to more serviceable levels, they're also concerned about the U.S. economy's health -- a view that, historically, means delayed consumer purchases.

Further, as PIMCO's Clarida has outlined, if these trends continue, the impact is obvious enough: The U.S. recovery won't follow a typical, historical GDP growth pattern.

In addition, the frugal-consumer era affects the global economy, as well. The world can't count on the U.S. recovery to create sufficient demand internationally. The seven-month reduction in consumer credit sends a strong signal to the rest of the world that they'll need to generate demand to fill the gap in the U.S. Simply, the days of "make the best, and ship it to the West," are long over. For the global economy to grow at an adequate rate, middle-class and working class citizens in China, India, Japan, Brazil/Latin America, Russia/Eastern Europe and Western Europe must consume more.