Personal Finance and Investing

The U.S. Federal Reserve issued a report that indicated U.S. consumer credit fell for the month of September. This makes the eighth consecutive month of consumer credit declines. It would be good to know the debt is falling due to better money management but for many the falling debt is a reaction to unemployment and tight credit markets.

In fact, consumers who have had virtually no change in their financial status during the recession are unable to borrow money unless they have near-perfect credit. In addition, banks are reducing credit card lines and those actions are leading to falling debt levels. It has become difficult to obtain signature, non-real estate secured, and auto loans also.

The economists had predicted that consumer debt would fall by approximately $10 billion in September 2009 but instead it fell by $14.8 billion. This equates to a 7.2 annualized rate of decline. What many don’t know is that consumer spending fuels 70 percent of the U.S. economy and that makes falling consumer credit a catch-22 situation. Unless consumers borrow and spend money the economy will continue to limp along at a considerably slower pace.

In other words, consumer spending is one of the most important factors needed for economic recovery. But with a jobless recovery underway the consumer debt levels could very well continue to decline.

As Chris Rupkey of the Bank of Tokyo-Mitsubishi UFJ Ltd. told Bloomberg.com, “This is truly an ugly (Federal Reserve) report in what it portends for consumer spending. If consumers are indeed the key to recovery, this economic expansion from the recession could be the weakest and most jobless one yet.”

Per the Federal Reserve report, credit card debt fell by $9.93 billion in September. The loans for autos and other assets fell by $4.87 billion. The $14.8 billion does not include home or equity loans.

While debt is declining, so is consumer spending. In September a fall in consumer spending was posted for the first time in 5 months. Rising unemployment is taking its toll on households. In addition, there have been government stimulus programs such as the Cash-For-Clunkers program intended to spur consumer spending and these programs have ended.

The Department of Labor reported unemployment increased once again in October to 10.2 percent. For many months the country has been warned that joblessness could go above 10 percent but it was still a shock when it actually happened. More distressing for households is the fact companies are continuing to lay-off with Verizon being one of the most recent to announce further payroll cuts. When counting the unemployed and the underemployed, the total jobless rate is over 17 percent for the U.S.

There were a couple of pieces of good news in the Federal Reserve report. First is the fact household net worth rose by $2 trillion in the second quarter of 2009. The second piece of good news is that defaults on credit cards declined in September.

The mixed economic news leaves many consumers wondering when they can expect to see an improving economy that benefits them at the consumer level. The recovery signs to date have mostly been at the banking and export levels.

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