Consumer Credit Use Fell for Fifth Straight Month in June

Consumer Credit Use Fell for Fifth Straight Month in June
Consumer Credit Use Fell for Fifth Straight Month in June

There's no more telling statistic about the structural changes occurring in the U.S. economy than Americans' stance toward debt: They're reducing it, and that trend continued in June as credit-use fell another $1.3 billion, an annualized rate of 0.7%, the Federal Reserve announced Friday. That marked the fifth consecutive monthly drop in consumer credit, and the 19th decline in the past 21 months.

However, the June drop was less than had been predicted by a key survey. Economists polled by Bloomberg had expected consumer credit to fall by $5 billion in June, after declining a revised $5.3 billion in May, a smaller contraction than the initially-estimated $9.1 billion decline.

Over the past 12 months, total consumer debt has fallen 3.5% to $2.418 trillion from $2.506 trillion in June 2009. However, that's less than the 3.7% year-over-year contraction rate recorded in May.

Consumers Keep the Plastic in Their Wallets

Once again in June, all of the nation's consumer debt reduction occurred in the revolving debt category, which includes most credit credits. Revolving debt fell by $4.5 billion or to $826.5 billion. Non-revolving debt, which includes most auto loans, personal loans and student loans, increased by $3.2 billion to $1.592 trillion.

A perfect storm of factors coalesced during the recent recession that resulted in steadily declining consumer credit balances. Stagnant incomes in many job segments, the loss of more than 8 million jobs from the workforce, reduced credit lines, and higher interests rates charged by banks and other card issuers have prompted Americans to reduce credit balances over the past two years.

Most economists view the declining balances as a positive long-term development, as Americans over-consumed in the previous 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 65% to 70% of GDP.

However, June's credit report was not without a qualified ray of light. For example, non-revolving debt rose for the second straight month -- but that's too short a period to consider it a trend, or to conclude that were seeing the sort of sustained increase in auto loans, personal loans, etc., that historically accompanies an expansion.