Raw Finance

More evidence that consumers are deleveraging from extremely high levels of debt came in the form of a record drop in U.S. consumer credit.  The total amount of consumer borrowing dropped by a record 8.5 percent ($17.5 billion) in November.  It also marked the 10th consecutive monthly decline in consumer credit.

Part of the drop is due to consumers paying down credit card and other household debt, but also included is the fact that banks continue to reduce the amount of credit that is available to consumers.  According to the Fed’s October Senior Loan Officer Survey, more than one-third of banks said they were decreasing lines of credit to existing credit card customers.  No banks increased their lines of credit.

The data serve as a strong reminder that the economic recovery is likely to be very slow.  When consumers pay down debt, they use dollars that could have been spent on goods and services.  Combine the reduced spending with high unemployment, which can cause nervous consumers to close their wallets, and we have a recipe for a very sluggish and uneven economic recovery.

While the equity markets may continue to rise on economic hopes in the near term, if economic data continues to disappoint, the market could turn ugly in a hurry.  Investors will need to be wary and opportunistic.

For the full data set of the November 2009 Consumer Credit report, please click on the “Consumer Credit” page on the menu bar at the top.