Consumer credit drops in February, driven by high savings rates and tighter credit

Stricter credit guidelines and a higher saving rate are responsible for the decline in consumer credit in February (Behance Network)
Stricter credit guidelines and a higher savings rate are responsible for the decline in consumer credit in February. (Behance Network)


Consumer credit for February decreased at an annual rate of 3.5 percent. Despite a modest increase in January of 0.8 percent, February’s results follow the monthly downward trend initiated during the fourth quarter of 2008.

The recent drop begs the question: Has consumer credit dropped because of tighter credit card restrictions? Or, have people simply stopped spending?

Many arrows point to increased saving. The personal savings rate for February was 4.2 percent and is expected to continue to rise in the coming months, economists say.

Asha Bangalore, vice president and economist at Northern Trust, posits that financially strapped households are saving more.  She said in a note that the 15-year stretch of increasing consumer credit ended abruptly in mid-2008 during the current downturn.

It should not be surprising to see a further contraction in consumer credit. The parsimonious behavior of households needs an offset to rejuvenate consumer spending. This is another aspect that justifies the fiscal stimulus put in place.

Wachovia economists John Silvia and Adam York stated in a special commentary April 1 that the personal savings rate at the start of 2009 was the highest it’s been since the 1990’s slowdown. Silvia and York applaud the increase in the savings rate as a way of readjusting over-leveraged household balance sheets.

In addition to considerable saving and debt reduction, it will take a major recovery in asset prices on the order of $16 trillion, all else equal, to bring household leverage ratios back to levels seen earlier this decade. Even using a conservative estimate of the ‘wealth effect,’ consumer spending should be lowered by a rate of $400 to $600 billion per year.


Adolfo Laurenti, economist at Mesirow Financial, said the drop in consumer credit is a combined effect of more rigid credit regulation and increased saving patterns.

“A lot of credit has been withdrawn, and the amount of credit people can borrow has declined,” Laurenti said. “At the same time there is a tremendous reduction in consumption. In fact, we are hitting rock bottom, as indicated by recent car and retail sales.”

Consumer credit for the month of March will be released on May 7. It will be interesting to determine whether the stock market rally in mid-March will have had any noticeable impact on the results for the month.

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