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Morris Segall      consumer credit, consumer sentiment, consumer spending, consumer spending sea change, credit card debt, Economic Growth, future trends, GDP

This past Monday afternoon, February 7th, the Federal Reserve released its report on consumer credit for the month of December, 2010.  Since peaking in the third quarter of 2008 consumer debt has steadily declined over the past two years by over $150 billion. Most of that reduction has been in revolving debt, largely credit card debt. This has reflected a combination of consumer debt repayment and the write-off of consumer loans in default by lending institutions and credit card issuers. After a further decline in November of last year, consumer revolving debt increased by nearly $2 billion on a seasonally adjusted basis or a 3.5% annual rate in December. This was the first increase since August of 2008 and most of that increase came in consumer credit card debt. Non seasonally adjusted data is more impressive, showing a better than $9 billion increase in revolving credit led by credit card gains at commercial banks. This change in credit card debt balances could be a signal the consumer de-leveraging is about over and consumer evaluations about their finances are sufficiently improved to allow them to begin increasing credit card purchases. If the December increase is not an aberration and continues in 2011, it will signify a dramatic change in the consumer spending dynamic.

 Up until last year’s fourth quarter, consumer spending had been anemic due to high unemployment and lagging consumer income growth, in addition to the de-leveraging of consumer balance sheets. That changed in the fourth quarter as consumer spending surged to pre-recession levels. The Federal Reserve data would indicate expansion of consumer spending in December was supported by the use of credit cards. This would explain the large increase in consumer spending (.7%) in the month of December, well above the .4% increase in consumer income growth in that month. If the December data portends a return to credit card financing by consumers, the prospect of continued high levels of consumer spending in 2011 is heightened. The willingness of consumers to increase credit card debt will counteract the suppressing forces of moderate consumer income growth and a continued high level of unemployment. This will promote a greater consumer spending contribution to the economy than one would have expected and augments the outlook for improved GDP growth this year, importantly led by the consumer.

 It remains to be seen if the December data is the beginning of a trend and we will be looking at future data to confirm or deny this important development. However, a note of caution. If consumers abandon the financial discipline of the past two years and return to spending in excess of income growth, a consumer spending renaissance will be short lived and a financially weak consumer sector will re-emerge, constricting long term economic growth.

Morris R. Segall, CFA, CIC