March 9, 2010It’s fascinating to watch this game when it comes to the release of the Fed’s consumer credit data. The numbers for December, which came out on February 5, came in far better than expected — falling only $1.7bln in December versus expectations of -$10.0bln. At the same time, the November figure, to very little fanfare, was revised to -$23.9bln from -$17.5bln initially. And last then this past Friday, December consumer credit was revised lower, by $2.9bln, to now show -$4.6bln from -$1.7bln initially. Hmmm. So what we have here are the revisions in the data over the last two months painting a much different picture of the level of improvement. We don’t like to appear as conspiracy theorists, but if you recall, the equity market bottomed on February 5 on two pieces of news that triggered a significant intra-day reversal. The first was the initial hints of an EU rescue plan for Greece. Later in the day, December’s consumer credit data were released, showing a modest decline of $1.7 billion versus the estimate of a $10 billion contraction. When you take into account the downward revision to November, what comes out of the wash is a December level of consumer credit outstanding that is was actually $6 billion lower than expected. But obviously not the way the data are being treated by Wall Street research departments or the media for that matter. Finally, with last Friday’s number, December was revised down an additional $3 billion as mentioned above. Hence, December’s number, which originally helped turn the market around, was $9 billion lower than November, versus the original release of -$1.7 billion. One other thing, revolving credit slid $1.7 billion in January and the level, at $864.4 billion, is now the lowest since October 2006. This is key and attests to the lingering consumer frugality theme. Moreover, the government was the sole supplier of funding that actually showed an increase in consumer exposure. All the gain was in federal government loans, they surged more than $10 billion and this was a student loan program being offered by the federal government. Every other lender — commercial banks (-$5.5bln), credit unions (-$1.4bln), ABS pools (-$1.1bln), savings institutions (-$500mln), nonfinancial business lenders (-$1.9bln), and finance companies (-$3.9bln) each posted declines in outstanding credit during the month. So, the credit contraction is far from over despite the illusion of the headline number. In addition, it was also interesting to see how the ‘seasonal adjustment factors’ helped skew the data. On a raw basis, consumer credit outstanding fell $3.8 billion in the second steepest January decline in the past eight years and somehow this was translated into a $5.0 billion increase on a ‘seasonally smoothed’ basis. Right.
Meanwhile, we have more data through the last month on lending and borrowing behaviour and they fit very nicely into our ongoing credit contraction theme. Total bank credit falls $20.0bln in the latest reporting week (February 24); this is on top of the $38.1bln decline the prior week. The declines in credit are dramatic and remain broad based:
Not only is credit not in abundance, or jobs for that matter, but gasoline prices have soared around 70% YoY and are pushing towards $2.30/gallon. As we said, shades of July-October 2007. It looks as though gasoline prices will hit $3/gallon during the spring, and while this no longer carries ‘shock value’, still keep in mind that the last time we were there in early 2008 the unemployment rate was 5%, half of today’s 9.7%. So, the economy’s ability to withstand such a move this time — let alone sustained outperformance of consumer discretionary stocks — is going to look a tad iffy at best.
(c) Gluskin Sheff
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