Consumers rebound from economic crisis, avoid taking on debt

Ken Goldstein

Ken Goldstein

A number of economic indicators suggest that consumers are spending more, though it is unclear how much more debt American consumers are willing to take on and whether they will spend more freely.

“Part of this story, beyond this month of this quarter, is the new austerity within the consumer market—both paying off debt and building up savings,” Ken Goldstein, an economist with research group Conference Board, said, referring to the psychological impact the financial crisis had on many Americans, according to The Miami Herald. “That’s not going to go away. It may ease up a bit, but we’re not going back to pre-Great Recession. That world is done.”

Before the financial crisis, consumption comprised two-thirds of all American economic activity. Credit was more easily obtained in pre-crisis days, leading consumers to purchase more home than they could afford and rack up large amounts of credit card debt. The crisis, however, forced consumers and businesses to pay down debts in a process known as deleveraging.

Data from the Federal Reserve revealed that, at their highest level, consumers had a debt-service ratio—the percentage of disposable income used to pay on debt of 14.08 percent during the third quarter of 2007. During the third quarter of last year, the ratio fell to 10.61 percent, indicating that consumers are getting rid of debt, which may be good for consumers but bad for the economy. Consumer spending accounts for approximately 70 percent of the American economy.

“The wounds of 2008 and 2009 may be four or five years ago, but they’re still fresh,” Susan Reda, the editor of trade magazine STORES, said, according to The Miami Herald. “We’ve turned a corner, but they don’t think they’re on easy street.”

Another report from the Federal Reserve showed that consumer credit grew at an annual rate of 6.5 percent, though revolving credit, which is comprised by credit cards and other loans without fixed-payment schedules, grew at an annual rate of 0.1 percent. The numbers, however, were better than in 2010, when revolving credit fell by 7.4 percent after an 8.8 percent decline in 2009.

“The consumer seems to stay in the game,” Jack Kleinheinz, the chief economist for the National Retail Federation, said, The Miami Herald reports. “We never expected them to fall off the beam.”

Retail sales are not likely to return to pre-crisis levels anytime soon, due in part to consumer uncertainty about the economy and job insecurity. Higher payroll taxes that took effect at the beginning of the year and the battle over the nation’s budget have also contributed to rising uncertainty among consumers, which is obvious in recent sales numbers.

Data released by the Census Bureau revealed that retail sales grew by only 0.1 percent in January, though sales were up 4.4 percent month-on-month compared to last year. Total sales from November through January increased 4.5 percent from the same period one year earlier, indicating a slow rebound that reflects an increase in the monthly average of 180,000 new jobs each month, according to The Miami Herald.

Though rising home prices and stocks have boosted consumer confidence somewhat, banks now require larger down payments for mortgages, and homeowners do not feel as confident in borrowing against the equity already invested in their homes.

“I definitely think the results of the recession will change the habits of consumers, because they won’t be able to borrow as freely as they did 10 years ago,” Kleinheinz said, The Miami Herald reports. “We know that consumer credit has been increasing, but they are very guarded in not keeping too many balances.”

Richard Hunt, the head of the Consumer Bankers Association, said that bank deposits have increased to more than $10 trillion, and while the institutions are eager to lend, consumer demand for loans has been weak.

“There was a crisis, people were severely impacted by it and [of] course they’re going to be more cautious going forward,” Tim Pawlenty, the head of the Financial Services Roundtable and former governor of Minnesota, said, according to The Miami Herald.

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