This afternoon the Federal Reserve announced that consumer credit had tumbled 8.5% in December, the largest drop since 1979. Revolving credit such as credit card debt dropped a whopping $17.5 billion or 18.5% on an annual basis, the largest drop since recordkeeping began. Good news is that consumers are repairing their balance sheets and acting in a more rational manner than we’ve seen in a long time. As we’ve discussed previously, the bad news is that recovery will be difficult without robust consumer demand.
Calculated Risk provides the following graph and commentary:
- “This graph shows the year-over-year (YoY) change in consumer credit. Consumer credit is off 3.9% over the last 12 months – and falling fast. The previous record YoY decline was 1.9% in 1991.
Consumer credit has declined for a record 10 straight months – and declined for 13 of the last 14 months and is now 4.5% below the peak in July 2008. It is difficult to get a robust recovery without an expansion of consumer credit – unless the recovery is built on business spending and exports (seems unlikely).
Note: The Fed reports a simple annual rate (multiplies change in month by 12) as opposed to a compounded annual rate. Consumer credit does not include real estate debt.”
The fact that the stock market is up a tad as we head into the close appears to bode well for the near term trend. With unemployment coming in materially worse than anticipated and ditto for consumer credit (economists’ consensus estimate of revolving credit decline was $5B vs. $17.5B actual) and the market closing up, momentum appears with the bulls. In a bearish environment you would have expected to see a 3 digit decline in the Dow. The bulls likely remain on top due to the perception that employment difficulties continue to stay the Federal Reserve’s hands relative to raising interest rates and low interest rates are tinder for stocks. Focus will be on earnings announcements beginning in the next few weeks. They are anticipated to be positive due to continued expense discipline and some top line recovery, potentially carrying the indices higher over the near term.
There is a growing consensus that the first half of the year will be good for both earnings and stock prices with vulnerability appearing in the second half. As you know I’m skeptical but playing along a bit. Caution and vigilance remain paramount but the market’s resilience in the face of bad news today was impressive.
