What underlies the numbers?

Consumer credit outstanding, reported by the Federal Reserve, fell $10.3 billion in June, double the consensus expectations. Consumer credit outstanding is currently at a level last seen in October 2007 as consumers continue to retrench in the face of a dismal labor market and weak wage and salary growth. The current recession marks the first decline in revolving credit, predominantly credit cards, on record. Revolving credit has decreased $59.8 billion from the series peak. Consumers are clearly rethinking credit usage as credit gets more expensive.

On the job market, numerous employment surveys and anecdotal reports from businesses suggest the bulk of major layoffs are now behind us. The extent of the improvement and implications for the recovery may be exaggerated, however. What appears to have happened is that businesses slashed output much more dramatically than sales declined, producing a huge drop in business inventories.

Nowhere was this more dramatic than in the motor vehicle sector, where the swing in output was amplified by bankruptcies at Chrysler and General Motors. Moreover, the early success of the cash for clunkers program will boost sales through Labor Day and allow vehicle production to bounce back a little further and for a longer period of time. Employment losses continue to be exceptionally broad based, with 76,000 jobs lost in construction and 119,000 jobs lost in service-providing industries. One notable area of weakness is retailing, which saw job losses essentially double in July to 44,000. Layoffs also picked up in wholesale trade and distribution. On the plus side, layoffs slowed a bit in the financial sector and temporary staffing companies shed just 10,000 jobs, which is far fewer than seen earlier in the year. Manufacturers shed only 52,000 jobs in July, which was the smallest drop since July of last year.

Meanwhile, the US retailers suffered another ugly month last month as same store sales plunged 5.5% mom, making July the second worst month of the year for merchants. It’s a particularly important month as it serves as a lead-up to the back-to-school period, the second busiest time of the year for retailers. Several of the nation’s leading retail chains - including mall-based specialty sellers, teen clothing chains, department store chains and even discounters suffered declining same-store sales last month as consumers continue to shun non-essential discretionary purchases. July’s slump marked the 11th consecutive month of same-store sales declines and more than half of the retailers it tracks missed their sales estimates for the month. The outlook for the sector is clouded because for most of last year retailers used chunky discounts to lure shoppers into purchases. Now that the industry has embraced inventory discipline – Chinese manufacturers report very low order levels so far this year – there should not be a repeat of the clearance bargains that once drew shoppers’ interest.

At the same time, a publication that got a lot of attention came from Deutsche Bank, which predicted that half of all mortgage holders in the US, about 25 million householders, could end up underwater on their mortgages. This isn’t the first time we’ve heard exceptional numbers on upside-down borrowers. First American CoreLogic figures there were already 11 million homeowners in that position at the end of last year, and Moody’s Economy.com estimates 16 million American households were in negative equity at the end of 2009Q1, up from 10 million at the end of 2008Q1. Almost a quarter of owner-occupied homes had mortgage debt that exceeded the values of those homes at the end of June, according to data from Equifax and Moody’s Economy.com. That number rises to 32% when looking at the share of homeowners with mortgages that don’t have equity left in their homes. Nearly 10% of owner-occupied homes now have mortgage debt with loan-to-value ratios of at least 125%, and roughly half of those homes have mortgage debt with loan-to-value ratios of 150% or more.