Consumer Credit Falls

As expected, consumer credit fell for the eighth consecutive month. Credit declined $14.8 billion in September, far worse than the consensus forecast of $10.0 billion decline. The consumer credit decline for August was revised up to $9.9 billion from $12.0 billion.

The reason for the decline in consumer credit has not changed. Consumers continue to believe they are too highly leveraged and are working to repay their debts. At the same time, banks are worried about possible loan defaults, and in return, they have tightened lending conditions and pulled available credit from even the most credit worthy borrowers. The data provided by the Fed does not provide a way with determining if the drop in consumer credit was driven more by consumers not wanting additional funds or banks not willing to lend.

Regardless, a drop in consumer credit signals lower aggregate consumer spending in the near term. Broken down, revolving credit lines fell by $9.9 billion while nonrevolving credit declined by $4.9 billion. There is no new data on commercial bank interest rates. The interest rates on car loans fell 56 bps to 3.50% as auto financing companies slashed rates to counter lost demand from the end of the Cash for Clunkers stimulus program. The total amount financed per vehicle rose by close to $6,000 as consumers did not have the $4,500 rebate to lessen the costs.