After years of focusing on paying down debt, American consumers have started opening their wallets to spend again.
Both moves helped the economy.
Consumers paid down debt, especially mortgage and credit cards, at a record pace from 2008 to 2010, a decision that helped stabilize the American economy after the credit crisis and financial meltdown of 2008.
Now that things are settling on the credit side, the economy could use some help from consumers in the form of spending money on more products and services, which they did in the first quarter of 2013. Consumer spending was up 3.2 percent, the biggest gain in more than two years.
That helped keep the economy growing at a slow, but steady rate of 2.5 percent, just under the predicted rate of 3.0 percent.
“The good news is that consumers seem interested in spending again,” Justin Wolfers of the Brookings Institution said on the group’s website. “We’ll see whether that holds up over the coming months.”
Debt Declined Dramatically
According to a report done by the Federal Reserve Bank New York, consumer borrowing, which peaked in 2008 at $12.7 trillion, fell to $11.3 trillion by 2013, an 11 percent decline.
Much of the decline is attributed to banks reducing available credit and tightening up rules for getting loans, but there is evidence that consumers got the message about borrowing to pay for their lifestyles. Loans to consumers dropped $500 billion during that period.
“While tightened lending standards have played a major role in the declining liabilities of the household sector, consumer-initiated reductions in debt have contributed as well,” the Federal Bank’s report said.
Much of the decline has to do with a drop in the use of credit cards. Credit card debt was $1.03 trillion at its peak in 2008, but dropped to $848 billion in February 2013, a 15 percent decline.
Total household debt, which includes mortgage, credit cards, student loans and auto loans, also dipped, going from a high of $13.8 trillion in March 2008 to $12.83 trillion at the start of 2013, a 7.2 percent decline.
The news about spending had a good side and a bad side. On the good side, the demand for automobiles and big-ticket appliances is still strong. Also up is the consumption of services, which grew 3.1 percent, the biggest gain for that sector in eight years.
And Now Comes Sequestration
However, some economists worry that a dark side is coming when the effects of sequestration kick in. Sequestration, the forced reduction in spending by the federal government, started March 1 and was barely felt in that quarter.
It could, however, be a kick in the gut to the economy the rest of the year, when the bulk of the $85 billion in reduced federal spending hits, especially from the Defense Department. Growth in the next quarter is supposed to be just 1 percent, and predictions for 2013 say growth will remain at about 2 percent for the fourth straight year.
“The bigger picture is that we have a fledgling recovery which needs help, but isn’t getting it,” Wolfers said.
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
- Newman, R. (2013, April 23). Americans Get Smarter About Debt. U.S. News & World Report. Retrieved from http://www.usnews.com/news/blogs/rick-newman/2013/04/23/americans-get-smarter-about-debt
- Bull, A. (2013, March 7). Household debts rise as confidence builds. Reuters. Retrieved from http://www.reuters.com/article/2013/03/07/us-usa-economy-debt-idUSBRE9260YG20130307
- Izzo, P. (2013, April 26). Economists React: ‘Persistent,’ but ‘Underwhelming’ Growth. The Wall Street Journal. Retrieved from http://blogs.wsj.com/economics/2013/04/26/economists-react-persistent-but-underwhelming-growth/