Consumer Credit Tumbles by Record in U.S. as Jobs Lost, Banks Reduce Lines

Discussion in 'Economics' started by ByLoSellHi, May 7, 2009.


    Consumer Credit Drops by Record Amid Job, Bank Losses (Update1)
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    By Vincent Del Giudice

    May 7 (Bloomberg) --
    Consumer credit in the U.S. contracted by a record in March after the jobless rate reached its highest level in a quarter century and banks made it harder to get loans in an effort to buttress their balance sheets.

    Consumer credit fell by $11.1 billion, almost three times more than forecast and the most since records began in 1943, to $2.55 trillion, according to a Federal Reserve report released today in Washington. The 5.2 percent drop at an annual rate was the biggest since 1990, the Fed said. Credit also decreased by $8.1 billion in February, more than previously estimated.

    Today’s report reflects a campaign by both consumers and financial companies to strengthen their books in the aftermath of the bursting of the credit bubble. It also offers evidence that lenders are reducing access to borrowing even after unprecedented efforts by the Fed and Treasury to sustain credit, including purchases of more than $200 billion of bank stakes.

    “When you have record job losses, you have to expect record declines in spending and economic activity in general,” said Richard Yamarone, chief economist at Argus Research Corp. in New York, referring to the 5.1 million jobs lost since the recession started in December 2007, pushing the unemployment rate to a 25- year high of 8.5 percent.

    Economists had forecast consumer credit would drop $4 billion in March, according to the median of 26 estimates in a Bloomberg News survey. Projections ranged from a $7 billion drop to a gain of $1.5 billion. The Fed initially reported a $7.5 billion decrease in consumer credit for February.

    Consumer Spending

    Consumer spending, which accounts for about 70 percent of the economy, rose at a 2.2 percent annual rate in the first quarter, the most in two years and may be helped further as banks resume normal lending following government stress tests that Treasury Secretary Timothy Geithner called “reassuring.”

    Revolving debt such as credit cards decreased by $5.41 billion in March, according to the Fed’s statistics. Non- revolving debt, including auto loans and mobile-home loans, fell by $5.69 billion. The Fed’s report doesn’t cover borrowing secured by real estate.

    Auto sales declined 37 percent in March from a year earlier, according to industry statistics. Sales incentives reached an average $3,169 for each vehicle sold in March, according to pricing monitor, a 30 percent increase from a year earlier.

    Even after signs that housing and manufacturing, two of the hardest-hit industries during the recession, were stabilizing, banks remained skittish about extending credit.

    Fed Survey

    The Fed’s quarterly survey of senior loan officers released on May 4 showed a larger share of banks reported tightening terms on residential mortgages compared with the previous survey, even as more domestic respondents saw increased demand for prime mortgages.

    That survey indicated most banks anticipate loan delinquencies and losses to increase this year, and that more banks also made it tougher for consumers to get credit-card loans in the past three months.

    Capital One Financial Corp., based in McLean, Virginia, said U.S. credit card charge-offs, or loans deemed uncollectible, reached 8.4 percent in the first quarter, exceeding an estimate given late last year.

    Economic figures in the past two weeks have shown smaller declines in U.S. house prices and a stabilization in sales, a jump in consumer confidence and the smallest contraction in manufacturing in seven months. The number of jobless claims in the U.S. unexpectedly fell last week to a three-month low, the Labor Department said today.

    ‘Letting Up’

    The London interbank offered rate, or Libor, for three- month loans in dollars remained below 1 percent for a third day today, indicating revived lending among financial institutions.

    David Wyss, chief economist at Standard & Poor’s in New York, said lending may be “a little more restrained” at Bank of America Corp. and other major institutions that need to raise significant amounts of capital. Otherwise, Wyss said, the credit crunch “is letting up.”

    Still, in March banks -- which have taken billions of dollars in government bailout funds and sold bonds guaranteed by the Federal Deposit Insurance Corp. -- remained less willing to lend than before Lehman Brothers Holdings Inc. collapsed last September.

    The rate decreased one basis point, or 0.01 percentage point, to 0.96 percent today, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks’ reluctance to lend, reached 4.82 percent after Lehman folded, narrowing today to the least since Aug. 4. It fell gradually as the U.S. government and the Fed spent, lent or committed $12.8 trillion to stem the longest recession since the 1930s.

    ‘Reassuring’ Tests

    The Fed will unveil today the results of its bank stress tests, which according to Geithner will give a “reassuring” picture of the U.S. financial system.

    “The fall in Libor is driven by the improvement in risk appetite,” said Guillaume Baron, fixed-income strategist at Societe Generale SA in Paris. “The results of the stress tests were well taken by the market.”

    Fed stress tests on the 19 biggest lenders show Bank of America, Wells Fargo & Co. and Citigroup Inc. together require about $54 billion, people familiar with the conclusions said. Financial institutions posted almost $1.4 trillion in writedowns and losses since August 2007, when banks became reluctant to lend to each other following the collapse in the U.S. subprime- mortgage market.

    To contact the reporter on this story: Vincent Del Giudice in Washington
    Last Updated: May 7, 2009 15:24 EDT
  2. Eight


    Consumer Credit reports are usually non events relating to trading but this one may be something else. Consensus was 4B, prior was 7 before they revised it to 8+ today and today's reported amount was worse than prior... dang...