Consumer debt levels fell again in August for the seventh month in a row. Facing continued instability in the job market, people are paying down their debt, as a way to protect themselves. Savings are up, and borrowing is down – which could weaken the recovery. Consumer spending accounts for 70% of economic activity in the United States.
Total consumer debt outstanding dropped by $12 billion in August, according to the Federal Reserve, reflecting an annualized rate of 5.8%. Reality outpaced Wall Street's expectations, which were around $10 billion. In July, consumer debt outstanding fell $19 billion (9.1%), which was the largest in hard-dollar terms since 1943 and on a percentage basis since June 1975's 16.3%.
While consumer fear is playing a significant role, as a touchy housing market and dicey job situation leave little to lean on, the banks are also responsible for the change in direction. They aren't lending as easily, with stricter standards limiting the amount of credit available to consumers. You can't spend what you can't borrow.
There is now $2.46 trillion in consumer credit outstanding (which doesn't include mortgages), down 4.6% from its July peak. And, consumer spending was up 1.3%, suggesting that consumers were actually spending money they had.
These factors are having an effect on credit card companies, of course. Credit card debt fell 13.1% in September, its largest decline since February. In addition to seeing these cards paid down, cuts in credit card limits are also assumed to be responsible. Credit card companies cut limits for approximately 58 million cardholders during the 12-month period that ended in April. Non-revolving debt, on the other hand, such as car loans, fell only 1.6%, compared to 12.6% in July.
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