Yesterday the Federal Reserve released its July figures for consumer credit. Looking at the numbers, it seems as if we have passed the tipping point and started our descent regarding consumer credit. This will have drastic effects on the economy (consumer spending is 70% of GDP). Over the last decade, consumer spending has been fueled by easy credit and asset bubbles. If available credit falls off a cliff, consumer spending will follow soon after. Below is a graph of historical consumer credit since 1943 (source).
What is most striking about these numbers is the rate of change. In Q3 of 08, consumer credit growth was still positive at .6%. But from Q4 onwards, consumer credit has been falling at an accelerating rate. In Q1 of 09, consumer credit fell 3.7%. In Q2, credit fell 6.6%. This decline has continued throughout the summer. Consumer credit fell 7.4% in June and a striking 10.4% in July. The July figure is the most interesting. If consumer credit continues to decline as it did from June to July, then consumer spending will be much worse than expected. July could be an anomaly, so the August numbers will be interesting to keep an eye on. If this trend continues, a double-dip recession is a certainty.
