Consumer Debt Editorial - 09/11/09
Consumers cut down red ink

Whether it's because they want to or because they have little choice, U.S. consumers are reining in their debt.

The Federal Reserve said Tuesday that consumer borrowing fell by the largest amount ever recorded in July. While economists had expected credit to fall by $4 billion from June to July, the actual amount was more than five times that figure - $21.6 billion.

That was the biggest decline in 56 years, when the records were first kept.

The recession, no doubt, has Americans more than a little shell-shocked. Experts say it is over and the economy is expanding now, but that is little solace to any worker who held one of the 6.9 million jobs that have disappeared since December 2007.

And it's not much comfort to those workers who have so far survived the numbers game that has cost friends, relatives and co-workers their jobs. Those who have jobs likely haven't see any recent bump in pay, and hundreds of thousands have lost income because of furloughs that businesses and government agencies have instituted to stay afloat.

It's just not the kind of climate that makes you want to go out and borrow a couple of grand for a vacation or sign up for a new gold card. Indications are that more jobs will be lost in coming months and that unemployment will hit double digits before things get better. Financial experts saw the fact that the United States lost only 216,000 jobs last month as a positive sign.

To say that consumers, who also cut $15.5 billion in borrowing from May to June, have changed their spending habits on their own is likely too charitable. Credit is also a lot harder to get right now, though not impossible, as the $2.47 trillion in U.S. consumer credit that is still out there attests.

Erik Hurst, economics professor at the University of Chicago Booth School of Business, told The Associated Press Tuesday that it's impossible to know how much of July historic drop was caused by tight credit and how was a change in consumer habit. "We are seeing declines in demand for loans from consumers but also declines in the supply of loans from banks," he said. "How much of the credit cutback is due to the decline in supply or demand, you can't really tell."

It would be nice if government would take the cue and cut down on unnecessary spending, but that may be change that is beyond hope.

The more disciplined attitude that consumers have developed for whatever reason will probably make the recovery develop more slowly since consumer spending accounts for 70 percent of America's economic activity. But it also may end up creating a more solid financial foundation for the nation.