I don’t kn0w how much of the bigger-picture stuff you guys follow. Sometimes economic data  like consumer credit levels seems so academic and so long-term, that the impact on our portfolio is impossible to really define. It all matters though, so we’re going to take a step back today and see if we can figure out why consumer credit levels are at multi-decade lows. Some are blaming the banks, but I’m not so sure. Let’s just start at the beginning.

Consumer Credit Levels Down

You’re not imagining it – consumers have access to less credit than they did a year ago. They have less credit than they did 15 years ago. These charts from Briefing.com show the year-over-year percentage  changes or the total dollar reduction of revolving and non-revolving credit.

There’s no room for interpretation here…. credit is indeed contracting, which does not help any economic recovery effort. Take a look at the charts, then keep reading.

Consumer Credit Month-to-Month - 11/05/09

Consumer Credit Year Over Year % Change - 11/05/09

Before you blame the banks, credit card issuers, and ridiculously-tightened lending standards though, you should know something else….

The TED Spread

TED Spread - 11/05/09

I’m not going to get into the mechanics of what it is and how it works. I’ll just describe the TED Spread as the difference between interest rates for 3-month T-Bills and the 3-month LIBOR rate. The LIBOR rate (London Interbank Offered Rate) is what banks charge each other for short-term loans. Its importance to ussimply that the TED spread measures the lending market’s overall perceived credit risk.  The lower it is, the lower the perceived general risk is to lenders.

As you can see on the nearby chart (from Bloomberg.com), the spike in the TED Spread in late 2007 and most of 2008 has been negated; the TED Spread is back to where it was when things were just fine in 2006 and early 2007. Point being, it’s not like banks and lenders are pushing people off their doorstep.

LIBOR-OIS Spread

LIBOR-OIS Spread - 11/05/09

Similar to the TED Spread, the LIBOR-OIS Spread is an indication of the perceived availability of funds for short-term loans… the one’s that keep thing running smoothly in the interim for banks while they go out and sell bigger, longer-term, and less liquid loans. Again, lower is better.

As the nearby chart of the LIBOR-OIS Spread (also from Bloomberg.com) shows, it’s not like banks aren’t liquid either. In fact, banks are more liquid (cash heavy) now than they have been in years… including the middle of last year (right in the heart of the implosion).

Bottom Line

My point is, not that the banks deserve a pat on the back, but we need to be careful about blaming them for the easing of consumer spending. They’re done their fair share to stifle it, but that fact is, credit is there for those who need and want it. Consumers just don’t want it. I can’t say I blame them given the situation, but unless they start spending, this is going to be a very long recovery process.

The consumer credit levels (not the two ’spread’ charts, but the two consumer credit charts from Briefing.com) are now the missing piece of the puzzle. Those two charts will need to rise for the economy to truly start growing again.

As for what you can do with this information as an investor, there’s not a lot you should be doing with it immediately. I’m not one of those gloom-and-doom pundits that assumes we’ll never recover. In fact I see more upside than downside for the economy at this point. However, this should be data and information you keep in the back of your head, before you dig in deep with assumptions and significant capital.

Bluntly, the economy isn’t nearly as healthy as some folks think it is, simply because consumers don’t want credit.