Consumers Cutting Down On Borrowing And Spending, Opting For Cash Instead Of Credit
In the wake of one of the most devastating economic downturns the U.S. Has ever gone through, consumers have begun to wise up and are now avoiding the financial traps that left them exposed when the economy crashed. American consumers are now focusing on saving and paying off their debts. They are also getting credit shy and are moving towards cash spending instead. While that goes on, credit card companies are also tightening up their ship and are reducing available credit.
The current trend of consumers saving instead of spending is a good thing. However, according to economists, it may mean weakening the currently recovering economy. Consumer spending makes up a considerable 70% of the U.S. Economy. The economy won’t see Americans getting more confident and spending, however as they focus on saving and avoiding borrowing to protect themselves from widespread job losses, dropping home values and stagnating wages.
According to figures from the Federal Reserve released last Wednesday, total consumer debt fell to $12 billion last August, equating to a 5.8% annual rate. Economists at Wall Street expected a decline of $10 billion. In July, the drop in debt was $19 billion, equating to 9.1%. It was the largest decline in borrowing in terms of dollars recorded since 1943. It was also the steepest percentage drop since June of 1975 which saw a drop of 16.3%.
Zach Pandl who serves as an economist at Nomura Securities said, “Consumers are clearly becoming much more conservative about their spending habits (and) paying down debts”. He added, “This is likely to continue”.
The declining trend is a reflection of the drop in credit demand by consumers. It also shows the effect of the tightening standards among banks and other lending institutions. The report from the Fed puts the total outstanding consumer credit at $2.46 trillion which dropped by 4.6% from its July peak. The report covers store cards, regular credit cards, personal loans and auto loans. It does not take into account mortgages and other real estate debts.
The August retrenchment happened even though consumer spending increased by 1.3%, according to a Commerce Department Report given last week. Pandl said that this suggested that consumers are increasingly using cash for purchases instead of credit.
Credit card debt also fell to 13.1%. This is the steepest drop in credit card debt since February. This reflects not only the trend of consumers paying down credit card debt but also reflects the massive cuts to credit limits credit card companies are doing. FICO released a report early this year which showed that companies cut credit limits for an estimated 58 million credit card holders in the 12 months prior to and including April.
