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Consumer Credit Continues to Contract: Sept Fed G.19

In September, consumer credit decreased at an unprecedented annual rate of 7.2 percent according to the Federal Reserve's latest G.19 report on individual indebtedness, as revolving credit declined 13.3 percent, a ninth consecutive monthly contraction, and non-revolving installment credit fell 3.7 percent.

In the third quarter, total consumer credit decreased at an annual rate of 6.0 percent. Revolving credit decreased at an annual rate of 10.0 percent, and nonrevolving credit decreased at an annual rate of 3.8 percent.

Revolving consumer credit - unsecured credit card debt - is collapsing at a never-before-seen rate, now down 8.8 percent year over year, the first such decline ever and down y-o-y eight months in a row, and stands $101 billion below December 2008's peak outstandings of $988.2 billion.

During this decade, through the end of 2008, revolving consumer credit grew at a 5.5 percent annual pace - about half the 11.0 annual growth rate of the last three decades, 2000s included. At the pace revolving consumer credit is shrinking, voluntarily through pay-downs and pay-offs and involuntarily via consumer bankruptcies, an amount equivalent to 1.2 percent of GDP, about $160 billion, will be "missing" by year-end.

In the Fed's October Senior Loan Officer Opinion Survey on Bank Lending Practices, released November 9th, in response to a special question about implentation of Credit CARD legislation passed in May 2009, "a majority of banks reported that they had yet to fully comply with the new law. Banks indicated that they expected to tighten many of the terms and conditions of credit card loans as a result of the legislation, with the notable exception of penalty fees and the length of the grace period for payments."

The continuing collapse of consumer credit, and its impact on personal consumption expenditures, the consumer share of GDP (still about 71 percent), remains a key component of our economic "reset" theme, in which a decline in consumer activity, some naturally expected as aging Baby Boomers rein in spending and some contrived by circumstance due to extended weak economic conditions and near record-high unemployment which will be slow in dissipating, will make any economic recovery tepid at best and exposed to the likelihood of a "double dip" at worst.

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