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September 10, 2009

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Home » Business » Economy

US consumer credit drop sparks household spending concerns

TOTAL United States consumer credit fell by a record US$21.6 billion in July, Federal Reserve data showed on Tuesday, the latest hint household spending would be too weak to drive the economy's recovery from recession.

July consumer credit outstanding fell at a 10.4 percent annual rate to US$2.47 trillion, steeper than analysts' expectations for a US$4.0 billion drop. Total credit in June tumbled US$15.5 billion rather than the US$10.3 billion drop previously estimated by the US central bank.

"It is one more important sign that consumers are not going to be contributing very much to the economy for the balance of this year and probably for a good part of next year. Consumers will be in the background," said Bernard Baumohl, chief global economist at The Economic Outlook Group in Princeton, New Jersey.

With an unemployment rate of 9.7 percent, the highest in 26 years, and incomes falling, households have drastically cut back on spending. Consumer spending accounts for about two-thirds of US economic activity.

While key reports suggest the economy is probably in the early stages of recovery from a recession that started in December 2007, continuing jobs destruction has raised fears it will be a slow process.

Big question

Consumer credit has now declined for six consecutive months, the first time this has happened since the period from June 1991 to December 1991, the Fed said.

"There is no way that this recovery can be sustained unless we see a pickup in household spending. The big question out there is will we see Americans spend again to keep this recovery alive," said Baumohl.

The recovery, which many economists believe is underway, will be driven by goods restocking, after inventories were slashed to record lows, government spending and historic low interest rates.

Nonrevolving credit, which includes closed-end loans for big-ticket items like cars, college education and holidays, plunged a record US$15.4 billion, or at an 11.7 percent annual rate, to US$1.6 trillion.


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