Despite Government Attempts to Boost Liquidity, Consumer Credit Continues to Contract, Stalling Recovery

Recent consumer credit data suggests that the economic recovery will be far slower than after previous recessions. Despite a moderating pace of job losses and heightened government spending, consumers remain cautious and are increasingly choosing to pare down debt rather than overextend themselves. Consumer credit balances fell by a greater-than-expected $12 billion in August, a 5.8 percent annualized drop, following a $19 billion decline in July. Lenders remain reluctant to extend credit, while consumers are increasingly cautious of taking on new debt due to uncertainty in the employment market.

The impact of tighter credit conditions and changing consumer behavior is most evident in revolving debt, which is comprised primarily of credit cards; revolving debt fell at an annualized rate of 12.3 percent in August. The recent decline was the second steepest monthly drop since the onset of the recession and signals that a consumer-led recovery will take some time to gain traction. The drop-off in revolving credit was surprising, however, given that personal consumption accelerated in August, which should support the use of credit.

Non-revolving credit, which is used to finance automobiles, home improvements and education, fell by $2.1 billion in August, a 1.6 percent annualized drop. The “Cash for Clunkers” program increased vehicle sales, offsetting some of the contraction associated with modest consumer demand. Non-revolving credit was expected to rise in September as more auto loans began to show up on credit balances, but the increase will likely be temporary, as consumers are putting off large purchases due to persistent concerns surrounding the weak employment market.

A growing propensity to save will have a dramatic impact on the speed and degree of the recovery, as consumption accounts for roughly 70 percent of gross domestic product. After peaking at 5.9 percent in May, the savings rate eased to 3 percent of disposable income in August, although that figure is much higher than in recent years.

The decreased use and availability of credit cards continue to hinder retail property fundamentals and lead to concerns heading into the holiday season. According to preliminary third quarter estimates, retail vacancy spiked 150 basis points year to date to 9.9 percent on negative net absorption of approximately 67 million square feet. Thus far in 2009, nearly 8,300 store closures have been announced, compared with 6,900 closures all of last year.

Merchants have trimmed inventories as a way to reduce costs and weather the recession. As a result, tenant demand for industrial space has slowed, pushing up vacancy 170 basis points year over year to 12.1 percent on negative net absorption of 88 million square feet.