Consumer Spending Drops Over Saving

While the country struggles in the recession with consumer credit diving to $21.5 billion in July, data shows that people are not only shying away from borrowing but are actually keeping their cash in their wallets.

The Federal Revenue has released word that credit card balances continue to drop as consumers have become more cautious in filing for credit. Many people choose to pay off their debts and as soon as they are cleared, they are keeping their credit cards untouched. Other than that, many are directing their incomes towards saving rather than spending.

People have thought of cutting back expenses on home repairs, vacation and the like. The only things the majority of consumers spend on are the essential of everyday living like groceries and gas. Consumers only managed to shell out some cash in July which boost consumer spending when the government introduced the Cash for Clunkers program. The spending rate increased to 0.2 percent. Cash for Clunkers allowed drivers to exchange their old vehicles for new, more fuel-efficient models. Still, if auto sales were excluded, the rate at which consumers spent was low.

The Federal Reserve addressed the poor spending matter. The agency said that without the increase in motor vehicle purchase which was caused by the said government program, indicators of consumer spending in general were mixed for the month of July. Due to several determinants, consumer spending remained on a weak balance. These include the fragile labor market which strained the household income and the previous net worth declines.

In contrast to consumer spending tumbling down, the personal saving rate is on the rise in the same month. A percentage of disposable personal income was 4.2 percent which is slightly lower than saving rate which is 4.5 percent in June. Although there was decline, analysts say that it is all part of an ongoing trend. People are seen to be "deleveraging themselves" to cut their debts.

Experts are lead to believe that people are trying to rebuild their cash cushions especially when they no longer have additional source of income with the values of their homes going down or completely out. It is predicted that consumers will continue to save some more in the coming months.

In the past, such savings rate was never attained. In fact, it was extremely low which does not really support a sustainable trend. According to economist Sean Maher, the demand for credit will also be lower when the recession is over.

Some analysts believe that the public relationship with credit cards are significantly altered at the moment and in will continue to be in the following months. However, it will also be a matter of time until credit cards find their place in the consumer's wallet once again. Furthermore, Mather says that consumers are having positive thoughts about economic recovery which would very well re-establish their credit card usage. However, it could take some time for credit cards to be in demand.

It is also predicted that consumer spending and revolving credit balances would turn to normalcy in the second half of 2010. this is the same time the Federal Reserve expect banks to finally adjust their lending standards and continue with their normal operations.

Doug Nicholas

Doug Nicholas, a financial consultant by profession with a Masters degree in International Business from Brown University, is also an ardent writer. Though he has a full time job at one of the companies listed on Wall Street, he does manage to squeeze in time to follow his passion. He puts his ideas to words in his articles related to finance and business.