In the longest consecutive decline since 1991, U.S. consumer credit posted its seventh month of contraction in August. Loans fell by US$12.0 billion, or 5.8% annualised, as banks kept lending standards tight and already debt-burdened consumers, worried for their jobs, refused to shoulder new loans.

Economists expect this contractionary trend in consumer credit to continue in the months to come, casting doubt upon the sustainability of the recovery currently underway in the U.S. and its trading partners, including China and other emerging markets.

Estimates of the July contraction, originally placed at a record decline of US$21.6 billion, was revised to US$19.0 billion, still a considerable number. The data come from a report released today by the Federal Reserve.

Credit cards and other forms of revolving credit decreased by US$9.91 billion, while loans secured by major purchases such as cars were boosted by the “cash for clunkers” scheme and only fell by US$2.07 billion. Mortgages are not covered by this report.

The clunkers scheme accelerated auto sales in August to the highest level in over a year. However, these sales appear to have been pulled forward or pushed back by purchasers eager to take advantage of the subsidy, as sales in September, after the scheme’s expiry, fell by 35%.

Another result of the clunkers scheme was an August increase in spending of 1.3% annualised. That figure includes a 5.8% jump in purchases of durable goods such as autos, adjusted for inflation. However, with personal income rising only 0.2% in August, economists don’t expect such high figures in personal spending in the months to come, particularly with an unemployment rate of 9.8% and an estimated 7.6 million jobs having been lost since the start of the recession in December 2007.

The fall in credit demand is in spite of the U.S. interest rate remaining in a historic low range of 0.0% to 0.25%. With inflation growth negative in annual terms, unemployment continuing to rise, and the U.S. economy unable to find sustainable traction, the FOMC has no reason to raise interest rates until possibly the second half of 2010, implying a long slog for the economy before real growth resumes.

Credit card balances written off as uncollectible soared to a record in August at 11.52%, up from 10.55% in July. Delinquint loans (over 30 days) are also higher than comfortable at 5.5%, rising with the rate of unemployment.

However, other recent data from the Federal Reserve indicated personal wealth has recovered with the stock indices, industrial production, manufacturing, and services. The increase of US$2.0 trillion for personal wealth in the second quarter of 2009 was the first in nearly two years.

Source: The Age