Stimulus and huge shifts in spending, wiping out entire industries and fattening up others.
By Wolf Richter for WOLF STREET.
American consumers – let’s face it, consuming is the number one top job during these trying times – have paid down their credit cards again.
In October, credit card balances and other revolving credit ticked down again from the prior month, and plunged by 10.3% from October last year, the steepest year-over-year drop ever, eking past the peak year-over-year drop during the Financial Crisis (-9.9% in January and February 2010):
On a seasonally adjusted basis, credit card balances and other revolving credit declined to $980 billion (green line in the chart below), according to Federal Reserve data this afternoon – a balance first seen in October 2007, despite 13 years of inflation and population growth.
Not-seasonally adjusted, credit card balances and other revolving credit ticked down to $943 billion (red line), a balance first seen in August 2007. Since the peak in December last year, balances have plunged by $151 billion.
And this is something we have seen in other data: The seasonal adjustments can no longer adequately grapple with the new borrowing patterns that defy seasonality. The classic seasonality in consumer borrowing, established over many decades and utterly predictable, has been obviated by events:
The mega-plunge in credit card balances in April was a result of the dual impact of stimulus payments that were applied to credit card balances and the lack of spending opportunities when big parts of the economy, where consumers normally use their credit cards to spend money, shut down, such as malls, restaurants, cruises, plane travels, and hotels.
Before the Financial Crisis, there had never been a year-over-year decline in revolving credit. For decades, Americans had been in the mode of piling on credit card debt with astounding passion and double-digit year-over-year surges in the early years, which allowed them to buy things and do things that they couldn’t otherwise afford, and it cranked up the US economy. The scheme lasted until the blowup during the Financial Crisis that caused the first-ever year-over-year decline. Now there’s the second year-over-year decline, and the steepest ever:
It has now become clear that there have been huge shifts in how and on what consumers spend money in this Weirdest Economy Ever, wiping out entire industries and fattening up others – with the net total still being negative, meaning a decline in consumer spending compared to last year.
Spending has been powered by stimulus money and extra unemployment benefits, and by record low mortgage rates that triggered a tsunami of mortgage refinancing that resulted in lower monthly payments, which freed up money to spend on stuff, while many homeowners did cash-out refinancing, encouraged by the surging price of their home, and some of this money thus freed up or borrowed against their home is getting spent on stuff, and some of it is being used to pay down credit card balances or keep them from increasing.
And for those consumers able to pay down their credit cards, that’s a good thing, given that banks and credit card companies often charge usurious interest rates, such as 25% or more, in a zero-interest-rate environment.
For banks and credit card companies, it’s a tough fate because with the high interest rates they charge, that’s where they make big fat profits. No doubt, the Fed and economists are concerned about this development of consumers trimming the banks’ most profitable business.
But consumers who are able to get out from under their credit card debt, and stay out of it, should rejoice because there is a lot of stuff that they can buy with the money they didn’t spend on the 25% interest on $10,000 in credit card debt.
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