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Is the US Consumer Deleveraging or Defaulting?

The Federal Reserve recently reported that household liabilities - primarily mortgages, credit card debt, and auto loans - were $13.9 trillion at the end of June 30, 2010. That represents a $200 billion decrease in such liabilities over the 12 months ending June 30, 2010. Within the $200 billion decrease, credit card debt fell $83 billion. But according to information at, credit card charge-offs were $85 billion between June 30, 2009 and June 30, 2010. If the numbers are accurate, and there is always reason for some skepticism, credit card lenders wrote-off $85 billion of bad debts while credit card holders tacked $2 billion back onto their balances for a net decrease of $83 billion.

Is the U.S. consumer de-leveraging? Not necessarily. At least those with access to credit are continuing to use it, which is not surprising since a massive source of cash for common living expenses - residential home equity - has dried up, forcing cash-strapped consumers to use other sources of financing.

This might be good news, giving the outsized role of the consumer in driving GDP. But a closer look at credit card delinquencies is somewhat disturbing in spite of recent comments by Bank of America and General Electric that the worst of delinquencies is behind us.

For example, the charge-off rate in the second quarter of 2010 was 10.82%, the highest on record since 1989. According to information provided by Experian, the credit bureau company, the average number of credit cards per capita is 3.45 while the average number of credit cards delinquent by one month or more is 1.19 per capita. That suggests approximately 34% of all credit cards outstanding are delinquent by one or more payments. If the quarterly delinquency rate is increasing, this implies that the percentage of delinquent credit cards is increasing, too - not a good sign for economic recovery.

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