Okay, we will admit it; we are market junkies. And to be a market junkie these days means you have to spend an awful lot of time poring over economic data. Although it isn’t considered exciting work to most, the goal is to identify which data points are important and then try to determine what the data might mean to the economy and, in turn, the stock market.
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In getting to the point, there was an economic report released today that went almost completely unnoticed – even by us.
Part of the problem with this report is that most economic data is released in the morning and this particular data point didn’t come out until 3:00 pm eastern on a Friday. Thus, it will suffice to say that the vast majority of investors may not have been looking too hard for additional input with an hour to go in the week.
However, the fact that Consumer Credit (the total amount of consumer borrowings) fell by $17.5 billion in November was a bit of a shocker. Not only did the drop in credit mark the 10th consecutive month that consumers have borrowed less, it was also the largest drop seen since records began being kept by the Fed some 66 years ago.
Analysts had been expecting (always a key phrase when interpreting data) a drop in credit of $5 billion. And to provide further comparison data, October’s total Consumer Credit fell by $4.2 billion.
“This was a shockingly weak report, as it suggests that the deleveraging process taking place among U.S. households continued unabated,” Millan L. B. Mulraine of TD Securities told the Wall Street Journal. “The continued decline in credit remains the most serious risk for the economic recovery.”
The Journal goes on to suggest that consumers have had to “deleverage” (i.e. reduce debt) after overextending themselves for years. But, unfortunately for the state of the economy, there’s still no sign that this process will wind down anytime soon.
Why is paying down credit cards considered a bad thing? In short, because the money used by consumers to pay off debt is not available to spend at the mall (which stimulates the economy). So, while having less debt is indeed better for almost all families save the Trump’s, the government would prefer that we go back to spending willy nilly right about now.
Or as an economist might put it, since consumer spending is responsible for 70% of demand in the economy, a continuing drop in Americans’ use of credit is a bad sign for future economic growth.
However, we can’t place all of the blame on John Q. Public and his wife Jane. Sure, Americans remain concerned about the job market and are definitely feeling poorer given the damage done to their net worth over the past two years. But there is more to this than people simply deciding to stay home on the weekends and watch football.
As Meredith Whitney has been warning about for months now, banks continue to reduce the amount of credit that is available to consumers. According to the Fed’s October Senior Loan Officer Survey, more than a third of banks said they were decreasing lines of credit to existing credit card customers. And NONE of the banks said they were increasing lines of credit.
Putting all of this in useful terms, with the consumer busy deleveraging, corporate America not hiring, and the government nearly tapped out in terms of stimulus efforts (although this administration might be able to round up another trillion dollars or so if push came to shove, after all, spending is what they do best), it is tough to see how the economy is going to continue to grow once this initial recovery runs its course.
The bottom line is that most economists expect the economic recovery to be subpar. You see, if economic growth is not robust then the job market isn’t likely to come storming back either. And without improvement in jobs, it is hard to see how the consumer is going to start spending more. And without an improvement in spending, the growth in the economy is going to slow at some point in 2010. And we all know how the stock market reacts when the economy slows down.
It is for this reason that we have been saying that this remains a “buy and sell” market and that it is too soon to return to the days of “buy and hope” as your primary investment strategy.
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