Consumer Credit Fell 4.5% in May

Americans continued to pay down their debt in May, as credit shrunk for the fourth consecutive month. Consumer credit fell by $9 billion, or an annualized rate of 4.5%, during the month, according to the Federal Reserve. It's down $37 billion, also 4.5% annualized, since January. Both revolving debt (like credit cards) and non-revolving debt (like mortgages and auto loans) dipped in May, down by annualized rates of 10.5% ($7 billion) and 1.4% ($2 billion), respectively.

There was also a huge downward revision in the values provided last month for April's consumer credit tally. Total consumer debt was thought to have risen by 0.5% annualized or about $1 billion, mostly due to additional non-revolving credit, which was thought to have increased by 7.1% annualized or $9 billion. Instead, we now know that credit fell drastically in April. Total consumer debt declined by $15 billion (7.3% annualized), while non-revolving debt dropped by $7 billion (4.9% annualized).

Here's a chart showing some history for total, revolving, and non-revolving credit:

consumer credit 2010-05.PNG

As you can see, non-revolving debt has hovered around $1.6 trillion level for most of this time period. But revolving credit has steadily declined. May marks the 20th straight month it has decreased. It's down an incredible $144 (14.9%) billion since September 2008. It has been largely responsible for the decline in total credit over the same period.

All holders of credit saw their balances decline in May, except for one. The U.S. government continued to add more debt, with another $6 billion. Of course, that was vastly overshadowed by the $15 billion less held by other sources. Commercial banks and finance companies alone reduced the credit they provided to consumers by $10 billion.

Consumer credit is likely shrinking for a combination of reasons. As we saw with delinquencies yesterday, Americans are trying to be more careful with their debt load these days. So many are choosing to pay down what they can, rather than spend more money. But banks are also stricter than they used to be when it comes to credit underwriting. That prevents some debt turnover that might have replenished the dwindling balances.

While there's certainly a positive aspect of consumers having less debt, some argue that the recovery would be a lot better off if they were spending this money instead of paying down their loans. The $166 billion decline in total consumer debt we've seen since July 2008 could have gone a long way in stimulating the economy and creating additional jobs. Of course, the silver lining is that when the economy does fully recover, the American consumer will exhibit greater fiscal health than before to the recession.

Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

How to Cook Spaghetti Squash (and Why)

Cooking for yourself is one of the surest ways to eat well. Bestselling author Mark Bittman teaches James Hamblin the recipe that everyone is Googling.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

How to Cook Spaghetti Squash (and Why)

Cooking for yourself is one of the surest ways to eat well.

Video

Before Tinder, a Tree

Looking for your soulmate? Write a letter to the "Bridegroom's Oak" in Germany.

Video

The Health Benefits of Going Outside

People spend too much time indoors. One solution: ecotherapy.

Video

Where High Tech Meets the 1950s

Why did Green Bank, West Virginia, ban wireless signals? For science.

Video

Yes, Quidditch Is Real

How J.K. Rowling's magical sport spread from Hogwarts to college campuses

Video

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

More in Business

Just In