Consumer credit plunged by a record Amount in May, according to figures released yesterday by the Federal Reserve Board.
The drop of $3.43 billion after seasonal adjustment was "really more than we expected" said Jim Pflueger, an economist with the Federal Reserve consumer credit section. It came on top of a $1.09 billion fall in April, which was the first decline in consumer credit since May 1975.
May's drop was equivalent to an annual rate of decline of 13 per cent, compared with an annual decline rate of 8 percent in April. The decline in credit in May was mainly due to a dropoff in extension of new credit. There was a slight rise in the amount of debt which consumers liquidated, or repaid in the month, after very high rrepayments in April.
A sharp $1.343 billion drop in outstanding auto loans was major factor in the May decline in credit. The figures thus to some extent "reflect what we already know, that the auto sector is in the dumps" said Kevin Hurley of Chase Econometrics Association Inc., an economic forecasting firm.
The declines in outstanding credit in April and May followed the Fed's imposition of credit controls on March 14. The Fed later modified the controls in May and announced last week that they are to be phased out. Views Differ about the effectiveness of the Fed's controls.
Susan Flack, vice president of the American Retail Association, commented yesterday that consumer spending was hit both by recession and by the credit controls. She said that she was not "terribly surprised at the figures because we knew credit sales were down fantastically. But I did not know that it was so bad overall."
Pflueger commented there was "no question that things were slowing down before controls, but certainly they had some effect." However, he said he did not believe that their removal at the end of this month would have much additional impact on spending or credit for some time.
He predicted a further drop in credit for June "of between $2 and $3 billion." The Fed had expected a drop in outstanding consumer credit in May of about $2.5 billion, he said.
Extensions of new credit in May fell by about 6 percent, after seasonal adjustment, from their already reduced April level. They totaled $21.2 billion in May, according to yesterday's Fed figures.
New auto loans dropped by $533 million in the months, a fall of 9 1/4 percent. The category of consumer credit which includes personal loans and credit for retail spending was also verry depressed. It showed a net fall in outstanding debt of $1.57 billion, compared with a net drop in outstanding auto credit of $1.343 billion.
Consumers repaid $24.6 billion in May, a rise of $140 million from the April level of liquidations. Pfueger pointed to a slight decline in the among of revolving consumer debt repaid to banks in May, compared with April. This was partly due, he said, to the fact that consumers had prepaid some loans in April as the recession began to bite. Their pattern of debt repayment was then returning to normal in May.
Yesterday's figures also showed that outstanding credit for mobile homes was down by $33 million in May and for revolving loans was down by $488 million.
The biggest-ever monthly decline in credit recorded before the April fall this year was of $375 million in 1975.
Inflation only party accounts for the much larger figures shown in the last two months. They reflect how steep the plunge into recession has been this year. They are also partly a consequence of the very sharp buildup in credit last year and early this year, when personal savings dropped precipitously.
Hurley said the declone in credit reflected the general weakness in consumer buying power and probably some change in consumer habits. The Fed's credit controls only contributed indirectly to the falloff in consumer credits and it was there that the major drop in credit demand came, he said.
Many economists believe that the worst of the slide in the auto industry is now over.