Despite every effort from Washington, the American consumer continues to repair his/her balance sheet. The federal government has repeatedly gone back to what it knows and teased us with goodies (like cash4klunkers) in an effort to get us to spend money we don't have on things we don't need, but those days appear to be over.
(Bloomberg) -- U.S. consumer credit fell in September for an eighth straight month, the longest series of declines on record, as thousands of Americans lost their jobs and banks tightened access to loans.
Borrowing fell more than economists predicted, declining by $14.8 billion, or 7.2 percent at an annual rate, to $2.46 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $9.86 billion in August, less than previously estimated. The consecutive declines were the most since records began in 1943.
The optimists, who are already predicting that happy days are here again, fail to mention how the economy will rebound without the American consumer. Consumer spending is 70% of the economy. So how will the economy grow when the consumer is paying down debt rather than buying junk at the mall?
A good way of measuring of how Wall Street has completely underestimated this trend has been in the consumer credit numbers.
|Forecast Consumer Credit
|Actual Consumer Credit
It isn't just a matter of the so-called experts on Wall Street missing the forecasts in all 12 months of the past year by a large margin. The real trick is that they've missed 10 of those 12 months in the same way - by overestimating the spending ability of the American consumer. After a certain number of misses in the same direction it's no longer a surprise - it's a bias.
They keep expecting the American consumer to start spending again, or at least spend more than he/she is going to, no matter what the job market like look like. Wall Street seems to have missed the biggest and most important lesson of the last bubble - housing supported the American consumer. Not paychecks.
With the implosion of the housing bubble, the American consumer can no longer use their homes as ATM machines. With the implosion of the credit bubble, the American consumer can no longer tap easy credit from the banks.
It almost makes sense why the stock market seems to want to go higher, if you think the American consumer is just about to start spending again. At some point Wall Street is going to wake up to the fact that the game has changed and their premise is wrong. The American consumer isn't going to start spending again until either the jobs return, or their balance sheets are repaired. Neither of those things are going to happen anytime soon.
When Wall Street figures this out the stock market will correct very sharply. This realization is most likely to happen when the Christmas sales numbers begin to come in.