Yesterday we saw an unprecedented drop in the levels of consumer credit, across the board. This is simply another example of how people who consider past behavior and technical indicators, can never factor in a sea change in behavior.
It is clearly too early to say what this really means or if it will last, but it does indicate that Americans have been scared by the financial crisis and are moving much faster to deleverage themselves than anyone expected. Yes credit is still there and being used, but more and more Americans seem to be improving their individual financial status.
It also is possibly indicative of new policies by credit issuer who are making it harder to get credit, forcing frugality on some.
Considering the loss in home equity values that Americans experienced, clearly many are trying to replace those amounts by saving. In this respect, saving is being accomplished by reducing debt, where you can get a 19% return on your money. So the increases in savings we have seen in the statistics is actually a buy down of individual debt.
I am waiting to see the final results of the back to school season, which I believe was better than forecasted. I also think that Americans, seeing the end of the recession and feeling better about reducing their debt are going to spend this holiday season, not recklessly, but they are going to want to feel good and they are going to shop.
I have been saying here that we are going to grow modestly from where we have contracted to and all the data I see actually supports a slightly higher growth rate than I originally thought. However, Americans are not going to spend recklessly as they did in the past and that is the foundation for a lasting recovery. Weak businesses will continue to fail, not because of the recession, but because they are not competitive.
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