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Consumer and corporate debt moving in opposite directions Print E-mail
Monday, 30 November 2009

By Matthew Quinn

Most of the postmortems on Black Friday sales have focused on how much consumers are spending this year. But perhaps just as telling is what they're using to make their purchases.

Just over a quarter of people who shopped over the weekend said they used credit cards for their purchases, according to a poll conducted for Reuters by America's Research Group.

"That's an amazing shift in consumers' habits," Britt Beemer, founder of America's Research Group, told Reuters.

Instead, 39 percent of shoppers used cash, while the remaining shoppers used debit cards.

It appears consumers have realized their debt-supported buying binges are over. Plummeting home values and high unemployment have a way of sobering people up.

Interestingly, that harsh hangover-induced revelation is coming at the same time corporations set an annual record for debt issuance.

Yes, after having to take a year off from selling debt in 2008 when the credit markets essentially shutdown, corporations came back with a vengeance, needing only 11 months to surpass the previous record set in the easy credit days of 2007.

All of this, of course, is a function of the credit markets. Corporate debt is clearly being welcomed by investors, who are again accepting historically low yields as the Federal Reserve keeps interest rates near zero in order to spur the economy-or at least keep it afloat. Investors are surely encouraged by relatively strong corporate earnings so far this year, which have largely come from cost cutting.

At the same time, banks have been furiously raising interest rates and cutting credit limits in response to increasing card defaults and ahead of new consumer protection laws going into effect in February.

The average rate on consumer credit cards was 15.94 percent at the beginning of November, according to indexcreditcards.com, up more than 2 full points since March.

By the end of the third quarter of this year, total consumer credit outstanding was cut nearly 5 percent from a peak of roughly $2.6 trillion at the end of 2008, according to Federal Reserve data. There has never been such a pullback in consumer credit since the Fed started tracking such data in 1943.

That's really bad news for retailers and the economy as a whole, because we're all much better at spending what is seemingly other people's money than our own. People who buy gifts with a credit card tend to spend anywhere from 20 to 40 percent more on the gift, according to Beemer of America's Research Group.

Let's just hope all that debt is the right amount to keep companies going until the consumer credit comes back. But there's still no telling if old spending habits will come back with it.

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