Follow by Email

Wednesday, July 6, 2011

The New Reality: Economic Health and austerity?

The party is over and it appears as if the nation is in full hangover mode.

After having come face to face with a mountain of debt, consumers are now leading the way out by paring down their debt. The national savings rate has reached 6.4% from a low of 1.0% in 2005.  Total household debt has fallen from its peak at the end of 2007 at 138% of disposable income.

The National Savings Rate refers to an estimate from the U.S. Commerce Department of the amount of income left over after subtracting consumption costs and expenditures.  It doesn’t actually measure the amount of money Americans are saving or investing over the long-term.

The latest statistics from the Federal Reserve indicate that the total amount of consumer debt in the United States stands at nearly $2.4 trillion.  Based on the 2010 Census statistics, that comes to nearly $7,800 of debt for every man, woman and child living in the U.S.

So just how does that debt breakdown in terms of credit cards or the purchase of a new automobile?  Roughly 33% of all consumer debt, as of October 2010, is what is referred to as revolving credit.  The best example of revolving credit would be credit card debt.

The other 67% of that debt is derived from “non-revolving” type loans. This type of debt  includes: automobile loans, student loans, loans on boats, trailers, or even vacations.

The  incredible shrinking U.S. household debt
The amount that the average American household owes fell for the seventh straight quarter, a total of 6.5% since 2008, the Federal Reserve says.  It would appear as though the “easy-money” boom has given way to a strong contraction in borrowing(and spending).

How does all of this effect a consumer driven economy? At the end of the day is it a net good or a net negative when we become savers? It seems like a case of, “Damned if you do, damned if you don’t.”

Although the decline in indebtedness has improved Americans' personal balance sheets overall, it also has contributed to weak consumer spending, putting a drag on the economic recovery.

It seems obvious to me that consumers didn’t just rack up all that debt overnight.  If so, it seems that it could take a while to reduce it.  While consumers continue to wrestle with debt reduction their struggles could have a dampening effect on the economy.

What do you think? Is there a manageable way to keep a consumer-driven economy on track humming along without seeing consumers drowning in a sea of debt?


No comments:

Post a Comment