The official government reports have been issued for November 2009 and interpreting the statistics is a challenge in terms of what it means for 2010. For ten straight months consumers have borrowed less on their credit cards and taken out fewer loans. In fact, the amount of money borrowed in total on credit cards has fallen more than it has in 70 years.
The falling credit numbers generate mixed feelings though among those responsible for stimulating the economy. Consumer spending makes up a whopping 70 percent of the economy. When consumers are not borrowing…they are spending less which hurts factory orders and retailers and financial institutions are earning fewer profits. All of these consequences slow down the pace of the economic recovery. It’s almost that simple.
So the government is faced with a problem. Even as President Obama encourages families to save more and lower debt, the economy needs consumers to increase their borrowing and spending if the US economy is going to improve at a faster pace. The US Federal Reserve reported that total consumer borrowing has declined by $17.5 billion in November. Compared to October numbers, consumer borrowing rates for November fell by 8.5 percent.
It is not surprising that consumer borrowing on credit cards or from financial institutions continues to fall. The unemployment rate remains at 10%. But the number is really much worse than that when you factor in those who are underemployed, given up looking for work, or have run out of unemployment benefits. When everyone is included in the numbers the unemployment/underemployment rate rises to over 17%. In pockets of many cities, and in rural areas where manufacturing plants have been closing, the rate rises to an astonishing 20%.
Economists are worried consumers are going to continue to cut back on borrowing as they save more. Some consumers are refusing to borrow also because they want to add money to their investment accounts. As economists worry about borrowing and government encourages spending and saving, is it any wonder that many consumers are confused over what steps they should be taking to improve their financial condition?
In other words, should you save more, spend more, borrow more, or try to do all three? It is ironic that for years Americans have been told to save more, but if they do it now, the economic recovery could be impacted. By the way, the Federal Reserve numbers do not include home loans of any kind so the borrowing in question is for purchasing autos, major appliances, college expenses and so on.
Consumers faced with conflicting advice need to take the time to determine what will best serve their purposes. If there is virtually no household savings then establishing a savings account is essential for creating a financial cushion. Paying down credit card debt and managing affordable balances is important for financial health also.
The fact is that right now it is hard to borrow money and that is impacting consumer borrowing levels too. Even those with good credit scores have difficulty finding lenders willing to extend new credit right now. In the final analysis, consumers need to work on financial security first and as they gain sound financial footing the economic recovery will follow. You can bet that one day the banks will once again be trying to convince consumers to take out loans.
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