Total US consumer credit fell by an unexpectedly slight $3.23 billion in May, Federal Reserve data showed last night, although the previous month's drop was revised to a steeper decline than initially thought.
May consumer credit outstanding fell at a 1.5 per cent annual rate to $2.5196 trillion from $2.5229 trillion in April, as the US recession crimped borrowing, albeit at a much milder pace than in the previous three months.
“The figures show recession, but recession going to a period of stabilization, and then improvement,” said Marshall Front, chairman of Front Barnett Associates LLC in Chicago.
Analysts polled by Reuters had forecast consumer credit to decline by $9.5 billion in May, compared with April's drop which was revised to show a record decline of $16.52 billion. This was previously reported as a $15.7 billion fall.
The current string of four monthly declines in consumer credit is the longest since June-December 1991, the Fed said. Consumer credit has also declined in eight out of the last 10 months.
With credit card defaults at record highs, companies are slashing lending limits and closing accounts to curb losses.
Non-revolving credit, which includes closed-end loans for big-ticket items like cars, boats, college education and holidays, fell $400 million, or at a 0.3 per cent annual rate.
Revolving credit, made up of credit and charge cards, declined $2.9 billion, or at a 3.7 per cent rate.
"The era of free money is over and consumers have a lot of debt balance sheet clean-up to perform," said Lindsey Piegza, analyst at FTN Financial in New York.
“As households deleverage, in the long run this will produce a more sustainable consumer sector. In the short term this means less consumption,” Ms Piegza said.
Analysts expect the rate of industrywide losses from credit cards to peak at 12 per cent to 14 per cent in 2010, up from 10 per cent now, pushing annualized losses close to $100 billion.
The industry may not be profitable again until 2011, they said.
Reuters