On my daily news crawl I came across the AP headline “Fed: Consumers Cut Debt by Record $21.6 B in July“. I clicked expecting it to be a relatively banal story with a scary headline. But no, economists expected $4b and they got a $21.6b reduction in consumer debt in July, another of those records that, unlike Usain Bolt, we don’t want to hear about. Whether it be ‘non revolving’ loans that we use for cars, getting a degree, etc. ($15.5 b drop) or ‘revolving’ loans like credit cards ($6.1b drop), we are not currently inclined to spend.
Scraping my memory back to the joyous days of economics classes and the wonders of “propensities to spend” and other snooze inducing words, I do recall one bedrock principle. Anglo-Saxons either side of the pond like to spend money, preferably money we don’t have and may never have. This wonderful philosophy has fueled our economies for decades. Is this the start of a new leaning towards saving, or us all getting our individual houses in order?
For the small business sector this is a flag on play as many provide services to consumers or to business clients themselves serving the consumer. One way or another what we collectively spend ties into what we can earn. This should be an area to watch; ultimately, I think once born a spender it is hard to give up and this is our way of waiting for the signs of better times. I would be interested in your thoughts.
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3 Comments
I’ve been reading similar articles Stewart. I’d be a rich man if I knew the answers but my gut tells me that people will spend again – the US economy is dependent on that.
I believe the “propensity to spend factor” is repressed right now due to the greater worry of losing your job which of course fuels the saving desire instead. Credit card debt has started to drop as people also focus on reducing their card balances and of course more balances get written off with the rise in bankruptcies.
It’s all linked – when the worry factor goes down the spending will return however the bigger question for me is whether it will ever return to the levels seen over the past couple of years? Eventually it will of course as the population increases and also some people like to forget their troubles and celebrate by spending
I also believe however, as many others have commented, a new era is here where the banking sector has taken such a jolt they are unlikely to fuel spending with such easy loans and tempting credit card offers as previously.
The holiday shopping season will be starting soon and that will be another great indicator as this saga continues to unfold.
Overall I see this current trend as a positive sign. Comsumers are finally realizing there is a limit on credit and to start getting your house in order or it just might collapse like a house made out of cards, credit cards that is.
How long will this last. I doubt very much if this trend will last more than a year or two. I agree with you, that once you have spending in your blood, it will supercede the call of conservative spending. In the future, it may not be as intense as in the past, but it will be there.
Fear Not
My take is that consumers got a reality check with the economy in such turmoil of late.
The good thing about consumers is their short memory span. Once they see their open to buy increased and cash flow impoved the lust for aquisition will imporove.
Most noted is the new orders being placed for goods for Spring by the major retailers. This is in many sectors of consumers products.
Enjoy the hiatus, as we look to all be busy going forward.