As Consumers and Banks are Stretched, When Will the Band Break?

by: Michael Shedlock

Consumer credit has been on a tear as shown by the Credit Report released by the Fed on October 5:


Consumer credit increased at an annual rate of 6 percent in August. Revolving credit increased at an annual rate of 8 percent, and nonrevolving credit increased at an annual rate of 4-3/4 percent.


Consumer Credit 1970 to 2007

This chart shows how weak the deflation threat actually was in 2001 when the Greenspan Fed went on a slash and burn campaign cutting interest rates to 1% and fueling the biggest housing bubble and credit bubble in the history of the world.

Consumer Credit 1970 to 2007
Percentage Change vs. One Year Ago

In five out of the last six recessions consumer credit took a nose dive on a percentage wise basis as compared to the prior year.

Looking at the first chart it seems everything is rosy. Even the second chart shows we are a long way from the zero line. However, changes in consumer credit can be sudden, deep, and without much warning.

The housing recession has now spilled over in to a trucking slowdown and Wal-Mart is slashing prices on toys in an attempt to increase sales. Both of those topics were discussed in Ryder Blames "Freight Recession" on Housing Spillover.

Key Changes in Psychology
  • There is reduced demand for junk
  • There is reduced need to transport junk
  • There is no need to build more stores that sell junk

Rising credit card debt may tell one story but retailers starting price wars and a "freight recession" tells another.Minyan Peter offers a third way to look at credit card growth in Bank Data Reveals Stretched System.

To frame the revolving credit figure, here is some historical data:

credit card debt growth is accelerating at a time when retail sales growth is slowing suggests that more consumers are turning to their cards to finance their basic monthly cash flow. As I have said previously, it appears that the credit card banks have become the consumer lender of last resort. How long this can continue, particularly with the slowdown in personal income growth, (from 0.9% monthly income growth in January to 0.3% in August) remains to be seen.

While the “all clear” whistle may have blown for the stock market, the growth in system-wide bank balance sheets, particularly credit card balances, coupled with a meaningful decline in large bank capital levels indicates to me that our banking system is being stretched.

Consumers and banks are both stretched almost beyond belief. In this environment there is no incentive for any kind of corporate expansion that will create jobs. Without jobs, how much more stretching can consumers and banks take before the rubber band breaks?

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