The great American pullback
The amount of credit outstanding plummeted in July by $21.6 billion. That’s a record. It’s the sixth straight month Americans have reduced their borrowing and the 10th straight month that credit card balances have been reduced. Yeah, Americans! But it also means the economy’s turnaround might be even slower.
You can see the data in a report from the Federal Reserve. Here’s the takeaway from creditcards.com:
According to analysts, much of the pullback in revolving debt can be largely traced to an uncertain labor market. “Anyone who becomes unemployed at this point is anticipating a fairly long term of unemployment, so they don’t want to run up their debt right now,” says Sean Maher, an associate economist with Moody’s Economy.com…
Most consumers are “trying to rebuild their cash cushion. They’ve lost value on their homes, so that’s no longer a source of income that consumers can use,” Maher says, adding that he expects the savings rate to continue inching up over the coming months.
The Fed doesn’t draw conclusions about how much of the pullback is from Americans spending less and how much of it comes from lenders tightening. Surely, it’s some of both.
Since consumer spending is two-thirds of GDP, this trend could be a discouraging sign for the economy’s rebound. But considering the debt people built up over the years and the debt the government is currently accumulating, I find it difficult to call this a discouraging sign.
You?
- Sep 8, 2009 1:27 PM — Scott Jagow
- 9 comments
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Comments (9)
September 8, 2009 3:05 PM PT
I think it is an encouraging sign. We are finally seeing people realize the consequences of spending more than they earn or more than they have in the bank. It reminds me of the gambler who just knows he pay off his debts by doing the same thing over and over again. At least they have a chance to win, albeit it a tiny one.
I think the economy as it was 12-18 months ago was overheated so the contraction we are experiencing is really no surprise. In the end, the standard of living for Americans will be falling off but then, we were living an illusion based on credit.
Unfortunately, many people believed the marketing of credit and didn’t think about how they had to behave when they were kids on an allowance and if you didn’t have money, you couldn’t buy anything. I don’t remember having any credit extended to me then…
September 8, 2009 4:23 PM PT
Is Consumer Spending still really 2/3 of our economy? If we are seeing Consumer Spending shrink month by month, what is that number today?
What if the Consumer is no longer willing or able to make up 2/3 of the economy?
What then? What portion of our economy will fill the gap? Our extractive industries are in the tank, our heavy manufacturing has gone overseas, so what is left? Service? Service pre-supposes consumers with money to spend. What if the consumers don’t go there?
What piece of our economy is going to fill that gap between the old 2/3 number and the new one, whatever that will be…
September 9, 2009 5:00 AM PT
Hi Stanely,
Sad to say that nothing will. Manufacturing is cheaper in China, Brazil, etc. until that changes there will be no filler.
September 8, 2009 6:35 PM PT
Not sure how this is bad. This is encouraging as we can’t invest more than we save. If we are investing more than we’re saving, as we’ve recently done, we end up with a bubble. Recently it was the tech bubble that instead of allowing the economy to sort itself out, painfully but quickly, we dragged out and tried to hide from with cheap money policies that caused our housing bubble.
September 8, 2009 6:58 PM PT
Dan Ray, editor of creditcards.com here. Thanks, Scott, for noting the analysis from our Fed reporter, Jeremy Simon.
Regarding whether it’s good or bad, my take is, “yes, it is.” Economists call it the savers dilemma. It recalls St. Augustine’s prayer: “Lord, give me chastity and continence, but not now.”
Long term, yes, this is good for the economy’s ability to sustain itself. An economy based on treating home equity like a piggy bank was bound to fail eventually.
But having having spending screech to a halt rather than slow gradually puts a lot of strain on the ol’ economic engine, causing considerable short term damage.
So from an individual standpoint, yes, saving more and deleveraging is good. The dilemma is that from a macroeconomic standpoint, it drains money from an economy that needs liquidity badly, slowing the economy, causing more people to lose their jobs, making saving harder for America as a whole.
In other words, if every individual switches over at once to saving a lot more, we as a society may end up saving less.
So if St. Augustine were an economist and alive today (a miracle he might not wish for), he might say, “Consumers, please save, but not all of of you, not right away.”
September 9, 2009 5:12 AM PT
Does this mean that Americans pulled back from credit or that credit still isn’t available? I still hear that banks aren’t lending and if that is the case then that number would have dropped for that reason as well.
America is in rough shape.
September 9, 2009 10:13 AM PT
I don’t care if the recovery is slower, as long as it is solid and won’t just lead into another bust.
September 9, 2009 12:34 PM PT
I agree with Kevin 100%!!!!
September 14, 2009 11:19 AM PT
Memories of this time are not going to fade easily for people. Those free spending, free caring days I think are gone, at least for the foreseeable future. What I hope will emerge from this recession is a more financial responsible public. People are going to be weary, and that’s not necessarily a bad thing. I think when we do finally emerge from this downturn, that we’re going to see people saving a lot more money than they did in the past. That to me is a good thing. The borrow, borrow, borrow, spend, spend, spend, lifestyle is not one made for long term success. Eventually the bottom is going to fall out of anything like built like that. My dream is that a more secure, financial responsible America will emerge and that will be a country that is built on a solid foundation. It’s only going to take time.
Check out my blog on the record cut in consumer debt at… http://www.thedebtgazette.com/2009/09/set-record-for-cutting-debt-july/