Record November Drop in Consumer Credit Signals Hard Pessimistic Turn

Seasonally adjusted November consumer credit—which includes short-term, revolving credit and intermediate-term, non-revolving credit—took its largest monthly drop on record. Leading the plunge, revolving credit, which includes credit card and similar types of debt, was down more than $7 billion in November, after rising by almost $2½ billion in October.

Non-revolving credit, which includes borrowings for car loans and education, dropped hard, too: after rising by $7.1 billion in October, borrowings that include education and car loans slid $1.4 billion in November.

Taken together, revolving and non-revolving credit pulled back by $8.7 billion, marking a significant turning point in the economy.

Long-term debt showed the same pattern, with a significant increase in demand for home mortgage loans in October, followed by a sharp decline in November.

This type of consumer behavior is consistent with a "credit rush" in October to secure loans at low interest rates in anticipation of rates that would be too high if borrowing were postponed. Locking in lower rates in October means that the overall economy should experience a spike in activity toward the end of the year, followed by a significant slump later, as consumers avoiding further debt exposure reduce their demand for credit and use their available income for purchases and for service of debt already acquired.

The slackening pace of borrowing—for everything from items typically bought on credit cards to big-ticket items like cars and large home appliances—can have nothing but a negative impact on the U.S. economy, which relies on consumers for two-thirds of its activity. With no end in sight to rising domestic interest rates, businesses will eventually join consumers in reducing debt-financed projects and will have no incentive to expand, anyway, since lower consumer spending will have reduced demand for output. Further into the recessionary cycle, with businesses reducing output, demand for labor will pull back, pushing up unemployment rates, resulting in less disposable income, which will further reduce demand for business output, leading to even more unemployment.

Such recessionary spirals have been seen in the past, and the only way out is for interest rates to go down and stay down long enough for a slow recovery to get underway. But with record federal budget deficits causing the government to enter the lendable funds markets as never before, there can be no hope for lower interest rates for the foreseeable future. Adding to this, if the Republican plan to partially privatize Social Security is enacted, the U.S. Treasury will be forced to tap the capital markets for as much as $2 trillion more in the next several years, driving interest rates into territory not seen in decades.

Although that $2 trillion will certainly be a government-sponsored, debt-financed economic stimulus package for the banking and securities industries, such a narrowly focused government jobs program exclusively for bankers and stockbrokers is not expected to have any widely felt positive effects on the overall economy, burdened as it will be by high interest rates, a tax code shifting the tax burden onto labor and away from capital, and a ruling party that may not yet have learned—even in its third deficit-riddled Administration in less than two-and-a-half decades—any lessons in fiscal responsibility.