WASHINGTON – American consumers cut borrowing in February, shying away from credit cards, a Federal Reserve report said.
Consumer credit outstanding decreased at a seasonally adjusted annual rate of 3.5%, or $7.5 billion, to $2.564 trillion, the report Tuesday said.
Credit in January grew $8.1 billion, revised way up from a previously estimated $1.8 billion rise. And borrowing in December dropped $5.6 billion instead of $7.5 billion.
The February credit drop of $7.5 billion was bigger than what Wall Street expected, which was a $1 billion decline. It was the fourth decline in six months.
The Wall Street crisis and recession have made it harder for consumers, and businesses, to borrow money. The Fed last month rolled out details of a Term Asset-Backed Securities Loan Facility to loosen credit and relieve the economy.
The consumer-credit data exclude home mortgages and other real-estate-secured loans. These tend to be highly volatile from month to month and are frequently revised.
Nonrevolving credit, which is mainly automobile loans, increased in February by 0.2%, or $314 million, to $1.608 trillion. Credit in January climbed 4.6%, or $6.2 billion.
Revolving debt, which mostly reflects credit-card financing, retreated by $7.8 billion to $955.7 billion in February, or 9.7%. Credit in January had increased $2 billion.
People are wary of taking on debt. Government data last week said nonfarm payrolls plunged 663,000 in March. The economy has shed 5.1 million jobs since the recession started in December 2007.
The latest Fed quarterly "flow of funds" data showed U.S. households' wealth shrank a sixth quarter in a row at the end of 2008, and their borrowing dropped, too. The total net worth of households fell 9% to $51.48 trillion in the fourth quarter from $56.59 trillion in the third quarter. U.S. household debt decreased at a 2% annual rate in the fourth quarter, down from a 0.2% increase in the third quarter.
A picture is worth a thousand words. Consumer credit outstanding grew every year since 1992, a very unsustainable growth path that is now coming home to roost.
Consumer credit outstanding contracting full steam ahead is only one side of the coin. Indeed, quick cash from credit for consumers and businesses from credit cards and lines of credit are being cut by major credit companies and banks just as fast as consumers can pay it down or default as Credit Woes Hit Home:
For two years, Jack Diamond used his Bank of America small-business credit card to finance his plants-and-aquatics nursery business in Tampa, Fla. He would use the credit card to purchase plants, then pay down his balance after he sold lilies, pond plants and aquatic fertilizer to customers.
Last September, Bank of America Corp. cut the $46,000 credit line on his card to $27,200, just a few hundred dollars above his current balance. He couldn't buy the plants, seeds and equipment he needed for his spring selling season. He laid off six of his eight employees.
"I'm almost living paycheck to paycheck," says Mr. Diamond, 55 years old, who is considering filing for business bankruptcy.
...
A recent Federal Reserve survey found that about two-thirds of banks' loan officers reported that they tightened terms for business loans in recent months. Meanwhile the National Small Business Association, a trade group, said 69% of 250 surveyed small-business members faced worse terms on their cards, such as higher interest rates, in the second half of last year.
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"People are using their credit cards to keep the businesses going, so when that dries up, the businesses go," says Jeanne Marie Cella, an attorney in Media, Pa., who has seen a significant increase in small-business owners filing for bankruptcy.
...Until recently, credit-card issuers avidly courted small-business owners. Visa Inc., American Express Co., MasterCard Inc. and Discover Financial Services had an estimated 29 million business credit cards in circulation in 2008, up from just five million in 2000, according to the Nilson Report. Spending on the cards rose to $296.3 billion from about $70.4 billion over the same period.
Banks began moving into small-business credit cards in the mid- to late-1990s following the creation of credit-scoring models. One factor was a 1995 study by Fair Isaac Corp. and Robert Morris Associates, a trade group for loan officers and credit-risk managers, analyzing the performance of business loans.
The study surprised bankers. It found that a small business's cash flow and financial statements bore little correlation with how the owner would pay his or her bills. A much stronger predictor was the business owner's personal credit score. The banks concluded they could safely issue business credit cards to proprietors with good credit records even if the underlying business didn't appear to justify a loan.
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Credit-card issuers, naturally, see a different picture. The rate of business bankruptcy filings has outpaced consumer bankruptcy filings over the past 12 to 15 months. Average charge-offs for businesses with at least one charge-off jumped to nearly $11,000 from a little above $7,000 over the same period, according to data from Equifax Inc.'s commercial-business group.
Faced with rising losses, financial-services firms last year began scaling back credit lines, products and marketing to small businesses.
There's much more to that article worth reading. Relying on credit scores and ignoring cash flows while borrowing and asset prices rise exponentially is a recipe for disaster. Once again, the world of academia has fabricated yet another devastating theory based from models that resemble everything except reality.
Look for this trend to continue to worsen.
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