Just some amazing statistics out of the Fed late this afternoon in consumer credit - and it doesn't bode well (near to intermediate term) for the 70% of the economy that is based on spending. It does bode well for the long run as Americans actually act rationale and try to shed debt. Part of this data set is due to financial institutions pulling back on credit, but much of it is the reality that many Americans have enough stuff and need to delever. After 25 years of debt accumulation at which point anyone who doubted the American consumer was made a fool, the average domestic shopper has finally been scared straight if you will. This was finally the turning point where they have seen what little cushion they truly have when times get rough. As I've been saying for 2+ years, without a house ATM to provide a secret piggy bank, consumption patterns will change significantly for many.

If you are a stock market perma bull this is where you note each month Americans pullback buying stuff is laying the groundwork for the massive pent up demand that is coming around the corner. I will repeat what I say each time this argument is brought up - you can wish (demand) anything you want, but you need to have the ability to pay for it.*

*note: that was in the old economy; in the new economy the government helps to pay for it - so the ability to actually pay is not such a hurdle.

Long story short - even with the government handing us money to buy cars and homes (real estate is NOT covered in this report) we are seeing record setting % drops in credit. Keep in mind the tail end of July was the beginning of cash for clunkers - which means even with government handing us money to layer on debt to buy new cars, non revolving debt levels STILL contracted at a dramatic rate. And par for the course, June's data was revised downward - notice almost every government report is announced with great fanfare as better than expected, than quietly revised downward 30-60 days later ... it is called managing the market.

Via Reuters

  • Total U.S. consumer credit fell by a record $21.6 billion in July, Federal Reserve data showed on Tuesday, the latest hint household spending would be too weak to drive the economy's recovery from recession.
  • July consumer credit outstanding fell at a 10.4 percent annual rate to $2.47 trillion, steeper than analysts' expectations for a $4.0 billion drop. Total credit in June tumbled $15.5 billion rather than the $10.3 billion drop previously estimated by the U.S. central bank. (June was also revised down materially)
  • Consumer credit has now declined for six consecutive months, the first time this has happened since the period from June 1991 to December 1991, the Fed said.
  • Nonrevolving credit, which includes closed-end loans for big-ticket items like cars, boats, college education and holidays, plunged a record $15.4 billion, or at a 11.7 percent annual rate, to $1.6 trillion.
  • Revolving credit, made up of credit and charge cards, dropped $6.1 billion, or at 8.1 percent rate, to $905.6 billion, the data showed.
  • It is one more important sign that consumers are not going to be contributing very much to the economy for the balance of this year and probably for a good part of next year. Consumers will be in the background, said Bernard Baumohl, chief global economist at The Economic Outlook Group in Princeton, New Jersey. (we always have Uncle Sam, Mr. Baumohl)
  • There is no way that this recovery can be sustained unless we see a pickup in household spending. The big question out there is will we see Americans spend again to keep this recovery alive, said Baumohl. (yes there is a way - Stimulus 9.0, combined with $15,000 handouts for homes, combined with Cash for Clunkers 2.0... you just have to believe Mr Baumohl; together we can take even more from future generations to give to today)