The continuing decline in consumers’ use of charge cards and other forms of credit reflects an underlying weakness in the U.S. economy, experts say.
And it suggests a fundamental shift in the way Americans save and spend that is likely to act as a drag on the economy for at least the next several years.
Beset by rising unemployment and persistent credit tightening by banks, American consumers are pulling back. Although some economists welcome the trend after years of heavy spending, the belt-tightening is almost certain to have a negative impact on a U.S. economy in which about 70 percent of gross domestic product comes from personal consumption.
A new government report Wednesday shows consumer borrowing is still falling. The monthly credit-balance numbers from the Federal Reserve are considered volatile, and May’s decline was much smaller than earlier this year. But analysts said the overall trend is likely to remain downward.
“Consumers were living in a fantasy world for much of the last decade,” said Lyle Gramley, an economic adviser with New York-based Soleil Securities Corp. and a former Federal Reserve governor. “The financial crisis has been an enormous wake-up call.”
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The contraction in consumer borrowing and spending may have been inevitable.
Many people were using credit cards and home equity borrowing to cover expenditures that exceeded their incomes. The personal savings rate, which had been at or near double digits during much of the 1970s and ’80s, dropped to 1 percent or lower starting in 2005.
But over the last two years, personal income has been stagnant or declining. The recession has wiped out 6.5 million jobs and put millions more workers in fear of unemployment.
Moreover, the home equity borrowing used by many families to cover expenses has been choked back by the credit crisis and plunge in home values. Average home equity per household was estimated at just under $50,000 earlier this year, less than half of early 2006.
After falling sharply last year, personal spending showed signs of leveling off as government payments and tax cuts put more cash into Americans’ pockets.
But consumer expenditures remain soft, especially for automobiles and other big-ticket items; many people are clearly intent on socking away money. The personal savings rate jumped to 6.9 percent in May, the highest in 15 years.
“We have the biggest change in the history of consumer spending in the United States,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consulting and investment banking firm. “The consumer is wrecked.”
That could show up again Thursday when chain-store sales are reported by the International Council of Shopping Centers.
The Fed report said credit card and other revolving loan balances fell in May at an annualized rate of 3.7 percent. Analysts say that reflects weaker consumer appetite for credit but also banks’ unwillingness to open credit at a time when many people are underwater with their homes and struggling to make debt payments.
James Chessen, the American Bankers Association’s chief economist, said many consumers are trying to pay off their debt as they worry about the economy. That is leading to less spending.
“There’s greater savings because there’s greater uncertainty about what will happen to jobs and income over the next couple of years,” he said. “It’s going to be a slow climb out of this hole we’re in.”
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