$21.6 billion drop in consumer credit, a proof of no fast recovery

The data released by the Federal Reserve showed that the overall US consumer credit dropped by a record $21.6 billion in July which suggests that the recovery will not be fast and consumer spending fails to help it. The report reveals that July consumer credit outstanding fell at a 10.4 percent annual rate to $2.47 trillion which is substantially more than analysts' expectations for a $4.0 billion drop. Total credit in June tumbled $15.5 billion rather than the $10.3 billion drop previously estimated by the U.S. 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.

While consumer spending accounts for about 2/3 of the US economic activity households drastically cut back on their spending as a result of increasing unemployment and falling incomes. As it was earlier noted by UNCTAD economists the so called signs of recovery somehow seen in the reports are illusory. And while figures show that the economy is probably in the early stages of recovery, in fact continuing jobs cuts are suggesting that the recovery process will be slow.

It is for the sixth consecutive month consumer credit declines, 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.

"Credit is still shrinking and that is going to have an impact on consumption. As such, this remains an important part of the recovery since without the smooth functioning of credit markets, the recovery may stall," said Charmaine Buskas, a senior economics strategist at TD Securities in Toronto.