Rough Recession Waters for Credit Card Companies
Visa Inc. (NYSE:V), MasterCard Incorporated (NYSE:MA) and American Express Company (NYSE:AXP) may just be experiencing one of the strangest anomalies of the recession. Historically speaking, when a recession hits, nonrevolving credit (e.g. car and boat loans) decreases while revolving credit (e.g. credit card debt) remains generally the same. During our current recession, the exact opposite is happening as nonrevolving credit is remaining the same as revolving credit is decreasing.
The anomaly may be the direct result of government intervention with events like the Credit CARD Act and Cash for Clunkers. Ellyn Terry over at Macroblog has the story.
(Ellen Terry) - Total consumer credit outstanding expanded by $5 billion in January after contracting 15 of the previous 17 months. Consumer credit outstanding includes revolving and nonrevolving credit. Revolving credit is mostly credit card debt, and nonrevolving credit includes loans for items such as vacations, autos, and boats. Even with the slight increase in January, total consumer credit (after adjusting for inflation) has contracted nearly 6 percent since the recession began in December 2007. This number might seem like a huge contraction but compared with three of the past four recessions, it actually looks rather typical. Consumer credit contracted 9 percent in the 1973–75 recession, 11 percent in the 1980 and 1981–82 recessions (treated as one recession here), and 8 percent in the 1990–91 recession.
However, once the current recession is separated into revolving and nonrevolving credit, the relationship to past recessions changes. Typically in a recession, nonrevolving credit shrinks considerably while revolving credit shrinks little if at all. The trend so far in this recession has been the exact opposite; nonrevolving credit essentially has remained unchanged while revolving credit has shrunk 11 percent.
Is the decline in consumer credit the result of supply- or demand-side forces? Perhaps the answer is both.
According to the Federal Reserve's Senior Loan Officer Survey, demand for all types of consumer loans (revolving and nonrevolving combined) has fallen since the first quarter of 2009. A decrease in demand for consumer loans is plausible because consumers tend to delay big purchases such as cars and vacations when uncertainty about future income increases. Because future income is affected by job prospects, consumer credit demand lags the recession much like employment does.