The Great Debt Pay-Down Resumes: Consumer Credit Fell by $11.5 Billion in February

Americans' effort to pay down their debts unexpectedly resumed in February, as total consumer debt declined 5.6% or by $11.5 billion, after rising in January for the first time in a year, the U.S. Federal Reserve announced Wednesday.

Economists surveyed by Bloomberg News had forecast the level of outstanding consumer credit would remain unchanged in February after rising by a revised $10.6 billion in January, up from the previously-released figure of $5 billion. Consumer credit fell by $1.8 billion in December.

In the past 12 months, total consumer debt has fallen 4% to $2.448 trillion from $2.550 trillion in February 2009.

In February, revolving debt, which includes most credit cards, fell at a 13.1% annual rate or by $9.4 billion to $858.1 billion; revolving debt totaled $943.6 billion in February 2009. Meanwhile, non-revolving debt, which includes auto loans and personal loans, decreased at a 1.6% annual rate or by $2.1 billion to $1.589 trillion; non-revolving debt totaled $1.607 trillion in February 2009.

A Long-Term Positive, But A Short-Term Negative

A perfect storm of factors coalesced during the 2007-2009 recession, resulting in steadily declining consumer credit balances. Stagnant incomes in many sectors, the loss of more than 8.5 million jobs from the workforce, reduced credit lines, and higher interests rates being charged by banks and card issues all have prompted Americans to reduce their credit balances over the past year.

Most economists view the declining balances as a positive development, long-term, as Americans over-consumed in the last decade, resulting in high and in many cases unsustainable credit card balances. Short-term, however, the great credit card pay-down will lower U.S. GDP growth, as it will constrain consumer spending, which accounts for the bulk of U.S. GDP.

How should investors interpret the February data? It's a mixed bag. On the one hand, there was a large upward revision in January's total consumer debt, to $10.6 billion -- something that one would typically see as an economic expansion takes hold. On the other hand, the unexpected $11.5 billion reduction in total consumer debt February suggests that anyone who says the American consumer is returning to the malls with a shop-'til-you-drop outlook, is premature.

The bottom line: We'll need several more months of the data before one can form an accurate and meaningful conclusion regarding Americans' attitude toward and use of credit in 2010. As of February, the data is inconclusive.