Consumer Credit Declines as Households and Banks Repair Balance Sheets

• While the latest Federal Reserve Beige Book showed the economy stabilizing, the July report on consumer credit balances illustrates the severity of the recession. Consumer credit, excluding real estate loans, fell at an annualized rate of 10.4 percent during the month, as the effects of job losses have forced many Americans to scale back spending and pay down debt. Consumer demand for credit has waned, but banks also have clamped down on lending. The credit freeze may be starting to thaw, however, as the proportion of loan officers reporting tightening standards on credit card issuance decreased in August.

• Consumers are taking unprecedented steps to rein in debt and bolster household finances ravaged by the recession. The $21.6 billion decline in consumer credit in July is the greatest since records were first kept in 1943 and the ninth monthly drop in the past 10 months. Consumer credit decreased only 62 times during the preceding 788 months.
• Significant declines were recorded in both types of consumer credit. Non-revolving credit, which is used to finance automobiles, home improvements and education, fell $15.4 billion during the month, marking an 11.1 percent annual drop. A rebound in August is expected, however, due to the “Cash for Clunkers” program. Revolving credit, primarily comprising credit cards, decreased at a 7.8 percent annual rate in July.
• The steady drop in consumer credit decreases the likelihood of a short-term rebound in consumer spending, which accounts for about 70 percent of gross domestic product. With nationwide unemployment approaching 10 percent and employment prospects remaining weak, consumers are expected to spend less, save more and continue to pare down debt.
• The decline in spending has resulted in fewer visits to shopping centers by consumers, contributing to negative net absorption of 23 million square feet nationwide in the second quarter. Additional store closures in the third quarter foreshadow higher vacancy, with the national vacancy rate expected to rise 210 basis points this year to 10.5 percent.
• The decreased use of credit cards to purchase airline tickets and pay for hotel stays was a factor in a 410 basis point fall in hotel occupancy in July. Occupancy was 64.1 percent during the month, as the number of rooms rented to guests slipped 4.3 percent from one year earlier. Similar results are projected in August. Lower hotel occupancy in most areas also places additional strain on the performance of bars and restaurants.
• Consumers continuing to spend less and pay down debt in the near term also will affect the performance of properties that store and distribute consumer goods. Since the recession started, the nationwide vacancy rate in industrial properties has climbed 240 basis points to 11.8 percent on negative net absorption of 51 million square feet.