September 11, 2009
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News: Americans Are Borrowing Less
The Federal Reserve released statistics earlier this week that indicates Americans have curbed credit card spending and have borrowed less for the past six consecutive months. The nation's total personal, automobile, credit card, and recreational vehicle loan debt totaled nearly $2.5 trillion a record breaking 10.4% decrease for the month of July. It's difficult to say how much of the debt reduction can be attributed to consumers reduced card spending or from the banks tightening the credit availability funds. Although becoming less dependent on credit card spending is a good thing for Americans, it could have negative impact on the economy as approximately 70% of the nation's gross domestic product is derived from consumer spending.
Consumer reduced spending could also cause difficulty for the manufacturing sector. As retail continues to show signs of improvement, manufactures have stepped up production. If consumers reduce their credit card spending too much, retailers and manufacturers alike will be sitting with excess quantities of product. Experts say Americans have refocused their purchases to include more necessities like food rather than non-essential luxury items. Statistics also indicate that many Americans have cut up their credit cards and are choosing debit cards or cash adding to the decline in loan debt.
Banks and card companies have also contributed to the decline in spending and the nation's loan debt. According to the Federal Reserve's study, 35% of responding banks indicated that they have raised the bar on credit card qualification. Over 50% of them said they slashed credit limits for a large number of card accounts. Despite the fact that most major retailers depend on consumer spending for increased sales, many report they too have reduced card limits and tightened new account standards. A reduction in new automobile loans is another contributing factor as 33% of the survey bank respondents indicated that they have increased the standards for approval on new car loans. Most likely, the President's “cash for clunkers” program should contribute to increase spending in the automobile industry. What can be done for milk and eggs?