Consumer Credit Declines

A decline in consumer borrowing suggests more trouble ahead for the US economy.

Consumer credit fell $7.48 billion in February, or a 3.5% annual rate, to $2.56 trillion, the US Federal Reserve reports.

Consumers are cutting back on spending in the downbeat economy. In March, job losses exceeded 650,000 for the fourth month in a row. The recession, which began in December 2007, has sliced about 5.1 million jobs from the economy. The unemployment rate is now 8.5%, the highest level in about 25 years.

This is bad news for the economy because consumer spending represents about two-thirds of the gross domestic product.

The consensus estimate by economists surveyed by Bloomberg called for a $3 billion drop in consumer credit in February.

Revolving credit extended to corporations for a fixed period of time decreased at an annual rate of 9.75%, the Federal Reserve said.

The nation’s central bank this month started buying up long-term Treasuries in an effort to reduce consumer lending rates to goose the economy. The Fed may spend as much as $300 billion in the next 6 months in an effort to unstick credit. Many banks remain reluctant to lend at affordable rates.

It appeared that consumer spending had begun to stabilize as personal spending increased 0.2% in February after a 1% gain in January. But that now appears to be bargain hunting as consumers grabbed post-holiday sales - not the beginning of a rebound.

The 2008 holiday shopping season was the weakest in about 40 years. Many analysts look for consumer spending to remain flat or decline in the first 3 quarters of 2009 with, at best, an uptick in the fourth quarter that will leave the year about flat compared with 1.8% growth in 2008.

Food, drug and discount merchandize are expected to post modest gains in a generally sour year. The estimates do not include sales of cars and gasoline.

Wal-Mart (WMT) has continued to plump its bottom line in the recession, but traditional department stores such as Macys (M) and Saks (SKS) have slipped. Macys beat lowered expectations and Saks reported a fourth quarter loss.

Former President Bush’s effort to goose the economy with rebates failed because the checks were a one-time event and many citizens therefore tucked the money in a savings account. President Obama’s effort to boost consumer spending by adding about $8 a week to paychecks won’t do any better.

Keep in mind that any improvement in the fourth quarter may be a statistical quirk, created by weak performance in the previous year.

But that won’t stop politicians from claiming victory…or something.