For the 7th straight month this August, stats show that consumers have reduced their borrowing, with more focus placed on paying off their debts and with banks reducing the credit card limits of more and more credit users these days.
This shows how conscious Americans have become, exerting more efforts towards saving cash and borrowing less from credit card companies, banks, and lenders. With stagnant salary rates, job losses, and degrading home values all over the world, Americans have been pushed towards becoming more frugal in terms of their expenditures. While this is indeed a positive trend, economists still say that this can affect the recovering economy because 70% of the country's economy is dependent on the consumer's spending behavior.
According to the Federal Reserve, the overall outstanding consumer debt actually fell by $12 billion in August of this year, with a 5.8% annual rate. The economists of Wall Street had expected a decline of just $10 billion so the extra $2 billion is a welcome surprise.
This consumer debt fall in August follows the July drop of $19 billion, which is revised downwardly. This is deemed as the largest decline in the US dollar, dating back to the 1940s. Moreover, July's decrease is also known considered the steepest drop since the decline that took place back in June 1975.
Zach Pandl of Nomura Securities shares his sentiments, saying that it is clear how consumers have become more conservative when it comes to how they spend their money and how they pay down their debts. Pandl further states that this trend is likely to go on as well.
The percentage declines actually show that consumers are not demanding more credit to use or higher credit limits. This is also a strong indication of standard practices becoming tighter in both banks and lending institutions. As of the moment, the overall consumer credit outstanding reaches $2.46 trillion, which has declined by roughly 4.6% from the peak that it reached in July. The report given by the Federal Reserve covers store cards, credit cards, car loans, and other personal types of loans. The report, however, does not cover real estate related debt as well as mortgages.
These trends are also indicative of spending restraints until jobs are no longer scarce. With unemployment rate rising up to 9.8%, which is the highest it has ever reached in 26 years, more and more households have taken on more frugal spending habits, both in terms of cash and credit. Many economists even believe that the employment rate could reach beyond 10% next year, showing strong conviction that these frugal trends are here to stay.