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The Slow Contraction of Credit Continues

From both sides of the fence - credit demanded and credit extended - we are witnessing a contraction.  This is NOT a slowdown; this is not a case of slower growth.  We are in the midst of a true reduction in the amount of credit outstanding.  This is going on in conjuction with declining employment opportunities and reduced hours worked (33 hrs per week, continuing to be the lowest on record).  As I wrote in the HS Dent Economic Forecast in July 2009, we are moving to a world that as marked by less, and it is tied to  our ability and desire to purchase.

The Federal Reserve Flow of Funds report shows a contraction of consumer credit of $122 billion so far for the year, or a reduction of 4.75%. Consumer credit outstanding has been contracting for eight consecutive months, which is a record.  People truly are paying down debts.

At the same time, the availability of credit is contracting.  The NYT reported this morning that the major credit card companies have shed 72 million card accounts in the last 12 months, dropping the total number of cards outstanding to 555 million, an 11.5% reduction.  However, at the same time those companies have cut available credit lines from $4.6 billion to $3.4 billion, or a 26% decline. 

Bankers continue to tighten lending standards.  the latest Fed survey shows that 15% of senior loan officers are reporting that they are tightening standards.  While this is down from the meteoric 85% earlier this year, it still shows continued tightening of credit. 

As the noose closes, it will have an impact.  We will choke off even more of the economic activity.  Keep in mind, this does not in any way mean that economic activity will stop.  We are not saying and have never said that things go to zero.  It’s just a period marked by “less” as we go through an extended bout of private debt deflation.