Wall Street continues rising merrily as investors continue to ignore the gaping hole appearing in the strength of US consumer demand as consumer credit crashes by a record amount.
Figures from the US Fed showed an annual rate of fall of 10% in consumer credit in July, despite the billions flowing through the economy from stimulus spending.
Government spending programs such as the Cash for Clunkers scheme has convinced many that it will single handedly not only haul the economy out of recession, but leave it there by boosting consumer spending and manufacturing.
That is expected to boost retail sales for August. Those figures are out in about 10 days’ time.
The cash for clunkers program accounted for the entire 0.2% rise in consumer spending in July and will have a bigger impact on August.
But don’t be fooled, that will be a one-off boost and nothing more.
Thousands of jobs are being lost every day, people are losing their homes, and having working days and weeks cut.
The bottoming in new and existing housing is another factor blinding investors to the growing reality of life for US consumers, who account for around two thirds of US economic activity.
But that hides the horrible reality that US consumers are continuing to cut their borrowing and spending as they and their financial institutions engage in a two way deleveraging process.
Consumers are cutting their borrowings and saving instead of spending and institutions are cutting credit limits and terminating cards: it seems like a race to the bottom.
Just as house prices refuse to rise, despite the bottoming out, because of continuing deleveraging through foreclosure and other forced sales and banks chopping back on home lending, American consumers are being subjected to a similar destructive process.
So dramatic is this process that figures out on consumer credit for July from the Federal Reserve showed a record $US21.6 billion fall in total consumer credit in the month.
That was a fall of an annualised 10.4% to $US2.47 trillion, bigger than market forecasts for a $4.0 billion drop.
And it was made worse, with the fall in total credit for June revised upwards to $US15.5 billion rather than the $10.3 billion drop previously reported by the Fed.
The total amount of consumer credit now outstanding in the US is the lowest since August 2007 and is down $US115 billion.
US consumer credit has now fallen for six consecutive months, the first time this has happened since the period from the last recession in the last six months of 1991.
Non-revolving credit, which includes closed-end loans for expensive purchases such as cars, boats, college education and holidays, plunged a record $US15.4 billion, or at an 11.7% annual rate, and revolving credit (credit and charge cards) fell $US6.1 billion, or 8.1% annual.
Outstanding credit in July fell 4.2% from the same month in 2008 (which is close to when it hit its all time high). That yearly fall is the largest since 1944.
In Australia, consumer credit growth is weak and falling in some areas, such as margin loans.
But credit card figures for the year to June compiled by the Reserve Bank show an increase in the number of transactions and the value, and a small 0.7% fall in the outstanding balances in June of this year compared to June 2008.
It’s actually $246 million lower. That’s roughly half the adjusted rate of fall in the US in the same period.
