Economists surveyed by Bloomberg News had expected to see a September consumer credit contraction of $10 billion, after a revised $9.9 billion decline in August, and a $19 billion plunge in July. Consumer credit is down 4.7 percent compared to a year ago, and balances have fallen in 12 of the past 14 months.
In September, total outstanding consumer credit, including revolving and non-revolving credit, declined to $2.46 trillion, or by 4.7 percent compared to a year ago, the Fed said. In Q3, total outstanding debt declined at a 6.1 percent annual rate; it fell at 6.6 percent and 3.7 percent annual rates in Q2 and Q1, respectively.
In September, revolving debt, which includes most credit cards, fell at a 13.3 percent annual rate or by $9.9 billion to $889 billion. Non-revolving debt, which includes auto loans and personal loans, fell at a 3.7 percent annual rate or by $4.9 billion to $1.57 trillion.
A perfect storm of factors during the 2007-2009 recession has coalesced, resulting in steadily declining consumer credit balances. Stagnant incomes in many job segments, the loss of more than 7.6 million jobs from the workforce, and the effects of reduced credit lines and higher interests rates from banks and card issuers have prompted Americans to reduce their credit balances over the past year.
Most economists view the declining balances as a positive development, long-term, as Americans over-consumed this decade, resulting in high and in many cases unsustainable credit card balances. Short-term, however, "the great credit card pay-down" will lower U.S. GDP growth, as it will constrain consumer spending, which accounts for the bulk of U.S. GDP.
Economic Analysis
As the September consumer credit data indicated, Americans remain in belt-tightening mode, and paying down credit credit balances is a part of that cautious stance. The next major unresolved question concerns whether consumer spending, which historically accounts for 60 to 65 percent of U.S. GDP, will occupy as large a space in the U.S. economy in the future. If the current "frugal consumer" trend endures, it's highly likely that consumption as a percent of GDP will decrease.
Further, some economic schools argue that lower consumption levels imply a lower structural GDP growth rate for the United States -- arguing that a high rate of consumer spending is required to achieve a high GDP growth. Still, the frugal consumer era is young. Let's await another quarter of consumer credit data before declaring an end to the traditional consumption-based U.S. economy and the days of robust GDP growth.
