U.S. Consumers Cut Credit Debt for Seventh Straight Month

Consumer credit drops againThe frugal consumer trend continued in late summer, as Americans' use of credit plunged again in August. Total consumer debt fell by $3.3 billion, or a 1.4% annual rate, the U.S. Federal Reserve announced Tuesday. It was the seventh straight monthly decline in total consumer debt, and the 21st drop in the past 23 months.

A Bloomberg survey had expected the figure to fall by $4 billion in August after declining a revised $4.1 billion in July, larger than the initially estimated $3.6 billion. Consumer credit fell $1.8 billion in June and $2.5 billion in May.

In the past 12 months, total consumer debt has fallen 3.1% to $2.414 trillion from $2.491 trillion in August 2009. That's slightly less than the 3.2% year-over-year rate of decline recorded in July.

A Long-Term Positive

Once again in August, all of the nation's consumer debt reduction occurred in revolving debt, which includes most credit credits. Revolving debt fell by $5 billion, or an annualized rate of 0.6%, to $822.2 billion. It was also the 24th consecutive monthly decline for credit card debt. Nonrevolving debt, which includes most auto loans, personal loans and student loans, increased by $1.6 billion, or at annual rate of 0.1%, to $1.592 trillion.

The 2007-2009 recession led to the steadily declining consumer credit balances. Stagnant incomes in many job segments, the loss of more than 8 million jobs, reduced credit lines and higher interests rates by banks/card issuers have prompted Americans to trim credit balances over the past two years.

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Most economists view this as a positive development in the long term because Americans overconsumed in the previous decade, resulting in high -- and in many cases unsustainable -- credit card balances.

Short-term, however, the great credit card paydown will lower U.S. GDP growth because it will constrain consumer spending, which accounts for the bulk of U.S. GDP.

Americans are not only paying down revolving debt, they're weeding out frivolous consumption. If this trend continues, it will have implications for the nation's ability to lower both its high unemployment rate and for a sustained increase in corporate earnings. If no other dimension of the economy -- exports, for example -- makes up for reduced consumer spending, it'll be difficult for the U.S. economy to return to a robust, 2.5%-plus growth rate.
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