Consumers Are in Savings Mode

This is an excerpt from my “Moving Markets” newsletter for the month of November. If you’d like to get a complimentary subscription to receive each issue as it’s released, click here: www.usawealthmanagement.com.

The pool of consumers that are able to spend and contribute to the economy’s recovery is diminished and may even be shrinking. To make matters worse, consumers with jobs that have the ability to spend just aren’t spending at the same levels they previously had. Many consumers are focusing on paying down debt. An article published by the Associated Press on October 7, 2009 written by Christopher Rugaber stated the following:

U.S. consumers reduced their borrowing for the seventh straight month in August, as households trim spending and banks reduce credit card limits.

The Federal Reserve says total consumer debt outstanding fell in August by $12 billion, a 5.8 percent annual rate. That follows a downwardly revised drop of $19 billion, or 9.1 percent, in July. Wall Street economists expected a $10 billion decline in August.

Most of the cut was in credit card and other revolving debt, which dropped $9.9 billion, or 13.1 percent. Auto loans and other debt fell by $2.1 billion, or 1.6 percent.

Consumers are spending less and saving more in response to widespread job losses, stagnant wages and dwindling home values. Banks also are reducing credit limits on millions of credit cards.

Consumers are just not spending. As we’ve stated before, this recession is different. It’s a credit driven recession not an inventory driven one. Inventory driven recessions are caused by a build-up of excess inventories, the recession typically subsides once production is cut and demand once again catches up to supply. This recession is credit driven like the depression of the 1930’s. It will likely end when the excess debt in the system is dealt with either by being paid down or defaulted upon.

Many consumers, having reached their own personal levels of debt capacity, have decided to pay down their debt and reduce their monthly outlays. The urge by consumers to reduce their spending intensifies when economic conditions deteriorate and unemployment rises.

The minority of consumers continuing to spend at normal levels through the use of credit cards and loans are finding it more difficult. Consumer credit continues to contract at a high rate, a virtual body blow to a consumer spending dependent US Economy. This consumer credit report was released on October 7, 2009 (emphasis mine):

Consumer credit data continues to contract at a very steep pace, down $12.0 billion in August vs. a giant $19.0 billion contraction in July ($21.6 billion first reported). The decline reflects the increase in home-based borrowing, the result of very low mortgage rates, but also reflects consumer retrenchment and defaults as well as efforts by lenders to scale back borrowing. Revolving credit outstanding fell $9.9 billion with the average credit card rate at 13.71 percent, up from a second-quarter average of 13.31 percent. Non-revolving credit got a boost from cash-for-clunker sales, falling only $2.1 billion in the month, much less severe than July’s $16.6 billion contraction. The interest rate on new car loans jumped more than 60 basis points in August to 4.06 percent.

The Econoday chart below confirms consumer borrowing has declined significantly. The data for the chart was compiled by Haver Analytics.

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