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Consumer borrowing fell for the eighth straight month in September. This record-setting streak is due largely to tightening by lenders, unemployment and the conservative preference to pay down debt rather than spend. This widespread fit of fiscal responsibility, economists fret, could prevent a recovery from taking root, since consumer spending is responsible for 70% of the U.S. economy. This conventional thinking, of course, overlooks the fact that an eventual increase in spending that isn't fueled by consumer spending will yield a recovery that's more likely to last.
According to the Federal Reserve, borrowing fell at an annual rate of $14.8 billion in September -- it's biggest drop since July and much larger than the $10 billion predicted by economists. The behavior is exactly what you'd find in people worried about losing their jobs or focused on rebuilding safety funds and investment portfolios. Those who want to borrow are finding banks won't be complicit this time, as they clamp down on lending practices.
Revolving credit (e.g., credit cards) for consumers was down 13.3% in September, the same rate as August. This form of borrowing has fallen for 12 consecutive months. Nonrevolving loans (e.g., auto) fell at an annual rate of 3.7%, after ticking up ever so slightly (0.1%) in August. This anomaly resulted from the "cash for clunkers" program, which stimulated auto sales ... and borrowing.
Even with the September decline, total consumer credit outstanding is still $2.46 trillion, but it's clear that borrowers are working harder and harder to clear the decks. Total consumer borrowing fell at an annual rate of 7.2% in September, much better than the 4.8% decline the month before. Keep in mind that this measure doesn't include loans secured by real estate (e.g., mortgages), which would complicate the measures.
Many believe that the consumer spending (and debt repayment) behavior we're seeing now is driven by the high rate of unemployment, which reached 10.2% in October, according to the Labor Department. And, it's expected to keep reaching new heights, possibly until the middle of 2010. So, consumer spending will remain under pressure, even as the technically unemployed find alternatives to full-time employment (such as temporary work and contract jobs), because confidence in the income stream will still be lacking. Under pressure isn't the same as nonexistent, however, and increases in household income should trigger a bit more spending. Meanwhile, memories of the past year and a half or so could drive continued debt repayment, delaying a recovery.
If you're looking for hope, check the retail sector. Several companies reported year-over-year increases in retail sales at stores open at least a year, with the overall gain of 2.1% the best seen since July 2008 and double expectations. Winners include Costco (COST), TJX (TJX), Gap (GPS), Saks (SKS) and Nordstrom (JWN).
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