Like the proverbial canary’s demise in the coal mine, the initial rumblings of things to come can be subtle, and therefore easily misinterpreted. With that caveat, we’re cautious of reading too much into yesterday’s news from the Fed that consumer credit dropped for the second consecutive month in November, as the chart below reveals. The October/November stumble is the first back-to-back monthly decline since 1992.

We can’t help but wonder (again) if this is an early sign of an approaching secular pullback in borrowing, and by association an indication that Joe Sixpack will start saving more and spending less in the malls and online in 2006. More than a few economists have been waiting for no less for several years now, only to be surprised by Joe’s momentum to keep on truckin’. The economy, as a result, has powered on. But the debate on weighing the odds of more of the same returns anew with November’s consumer credit update.
“This downturn in consumer credit mirrors the sharpest quarterly pullback in consumer spending in the fourth quarter since the 2001 recession,” Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi Ltd. in New York, observed yesterday via But don’t throw in the towel just yet, he suggests, noting that “with the economy creating over 2 million new jobs per year, we expect consumer spending and credit to recover in the first quarter this year.”
Whatever the outcome that awaits for the great consumer boom is of interest to the global economy as well as investors in the U.S. Just ask China if its likes exporting consumer goods to American shores at valuations that greatly exceed what China buys from the U.S. We all know the answer, largely because we know that countries like to have trade surpluses, the U.S. being an obvious exception. But what if those Chinese exports materially slow? What might be the impact on China, and by extension, the Treasury market, over which China’s trade surplus casts no small influence these days?
Nonetheless, waiting for Joe Sixpack to crack has been a mug’s game. But Joe’s stamina on matters of consumption can’t last forever (or can it?).
No, comes the answer from some of the more dismal dismal scientists. As such, yesterday’s consumer credit update caught our attention, in part because the news is still fresh in our mind of last month’s brief encounter with an inverted yield curve in 2- and 10-year Treasuries, a state that’s historically foreshadowed recession or economic slowdown.
There are a million smoking guns in the global economy. Consumer credit is but one. That said, monitoring the various measures of retail sales and related trends promises to be one of the more insightful hobbies in 2006.