A Fed report shows U.S. consumer borrowing has increased — in a seventh consecutive month of credit expansion. Also making news, Fed chairman Ben Bernanke signaled continued monetary easing but no new stimulative asset purchases.
After a rough week in the stock market and a spate of negative reports, investors paid close attention to the news Tuesday afternoon for clues to the direction of the economy. The credit report and Bernanke speech did not keep U.S. stocks from falling a fifth straight day on Tuesday, though losses were negligible, with the S&P 500 Index declining just 0.1%.
Summarizing current economic conditions, Ross DeVol (left) of the Milken Institute, said: “Things aren’t getting worse.”
“Consumers are once again getting access to credit and have some confidence to take on more debt,” said DeVol, who serves as executive director of the nonpartisan Santa Monica-based think tank. “Since there’s been a dramatic fall-off in access to credit, most people see this as a positive sign.” Consumer credit declined in 2009 and 2010 but has been recovering so far this year.
The Fed report showed that while banks are lending again, consumers continued to pare down credit-card debt, which peaked in 2007. Overall, credit increased at a 3% annual rate; non-revolving credit roseat a 5.25% annual rate and revolving credit decreasedat a 1.5% annual rate.
“When you look at the increase, a lot of it comes from taking on education debt,” said DeVol. “What a lot of people do is go back to get an associate’s degree, or they might go to graduate school rather than get a job immediately.” The same thing occurred in the 1982 recession, he said.
While some market observers have lamented that a significant percentage of the reduction in household debt derives from defaults rather than repayments, DeVol continues to see credit conditions improving. “We’ve got a long way still to go,” he says. “Increased default rates is one reason consumer credit has declined [until recently].” But despite the fact that banks have had to increase their charge-offs, “the banking system is in much better shape, balance sheets have improved and they’re getting to lend again.”
On the broader economy, DeVol blames temporary factors on the recent slowdown: fallout from the natural and nuclear disaster in Japan and especially higher oil and gasoline prices resulting from the removal of Libyan oil from the market and fears about instability among other Arab oil producers.
“It is the threat of unrest spreading to places such as Saudi Arabia that has caused the problem. If you have any reduction of supplies there, then prices are going much higher,” and that he says is the true “wild card” in the economy.
“We entered 2011 with a lot of momentum. Consumer spending rose at a rate of 4%. Businesses are still investing, with the numbers especially strong in equipment. We averaged over 200,000 jobs a month” before May’s dismal report of just 54,000 jobs. DeVol sees further weakness over the next few months, but expects a resumption of 200,000-plus jobs per month starting in August or September.
DeVol, who hadn’t yet seen Bernanke’s address to the International Monetary Conference in Atlanta when he spoke with AdvisorOne, explained that the Fed Chairman will be waiting for fall employment figures to see whether the current slowdown is “just a blip in a longer recovery” before making any decisions about a possible QE3.
“In the near term, the Fed won’t allow balance sheets to run off. It’s going to reinvest income and keep its balance sheet at a really high level. Just by doing so it remains fairly accommodative. If growth is weaker than anticipated, then the Fed has contingency plans,” DeVol said.
On the debt crisis currently gripping Congress, the Milken economist explained “there’s a delicate balancing act that must take place. We need to move towards reining in the budget deficit, but we need to do it in the medium term to long term and not do it too drastically in the near term,” he said.
DeVol said market actors have to believe that the U.S. is taking on a credible plan that brings debt to a reasonable level. But “you can’t remove fiscal stimulus too abruptly because we still need the training wheels on the bicycle,” he cautioned.