Consumer Borrowing Is Down, But For How Long?

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Tim Pannell / Corbis

Americans relied less on borrowed money in April than they did in March—a sign that the pullback on debt-fueled spending continued into the spring. New data from the Federal Reserve shows that outstanding consumer credit which includes credit cards, auto loans and tuition financing, but not mortgages, fell by $15.7 billion to $2.52 trillion, an annualized drop of 7.4%. That marks the second-largest dollar drop on record, following March's $16.6 billion decline.

While more-cautious lending practices are certainly contributing to decreased borrowing, the bigger driver is that Americans are still feeling the effects of recession the unemployment rate hit 9.4% in May — and choosing to tap credit lines less. Commerce Department figures from earlier this week show that people are now saving 5.7% of their disposable income, the highest rate in 14 years. In an April survey of senior bank-loan officers, the Fed found that demand for loans from households was down in almost every category. (Watch TIME's video of Peter Schiff trash-talking the markets.)

In the most recent Fed data, use of revolving credit, like credit cards, was down 11% from the month before. Non-revolving credit — including loans for cars, boats, mobile homes, education and vacations — was off by 5.3%. The amount of outstanding consumer credit is now about what is was in 2007.

Whether or not the downward trend continues, though, is far from a sure thing. With scattered signs of economic rebound, consumers might soon feel confident enough to start spending more on everything from summer fashions to new cars and doing it with borrowed money. On June 4, an executive with MasterCard suggested that people were already starting to inch in that direction. Speaking at an investor conference, he said that thus-far unreleased results of the company's monthly spending survey indicate that while people were still spending less, the rate of decline has slowed. MasterCard runs the systems that process credit- and debit-card transactions and can therefore provide a more timely read on the economy than official government statistics.

A June 4 report from Fitch Ratings provides another glimmer of stability. The company's measure of credit-card late payments fell in May, after four straight months of record highs. The rate, though, was still 40% higher than a year before, and credit-card charge-offs which happen when a lender gives up on ever being repaid did continue to rise. Fitch analysts have anticipated that eventually one out of every ten dollars in credit-card debt will be written off this way, although the drop in delinquencies may indicate that people are getting a handle on their finances more quickly than expected. (Read "Financial Woes Spread to Smaller Banks")

Yet none of that changes the long-term reality of how indebted Americans are a structural issue that will require more than a couple of months to return to historic normalcy. A recent research note by economists at the Federal Reserve Bank of San Francisco points out that the ratio of household debt to personal disposable income a measure of how "leveraged" individuals are has barely budged from its 2007 high of 133%. In 1960, that ratio was 55% in 1960 and in the mid-1980s, 65%.

Are Americans borrowing less? Sure. But they might have a lot more pullback left in them yet.

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