Consumer Debt Drops Again

In another sign that it will be difficult to stoke the economy up into self-sustaining growth we learn toady that consumer debt dropped in August – the latest month for which we have information – by 5.8% or $11.98 billion. This is the seventh straight month of decline, which is the longest period of sustained contraction since 1991. Since the bottom fell out last fall only once – in January this year – did debt show a monthly increase. Obviously consumers are retrenching. Unemployment and the loss of paper wealth in home values appear to be the main factors cited as causing the retrenchment.

On the bright side: this debt reduction is a good sign long term: it could indicate that we will emerge with a less burdened and therefore more vibrant economy.

But in the near term the adjustment to those leaner balance sheets implies less spending and therefore more sluggish growth. The upcoming holiday season could prove to be a second straight year of weakness for retailers.

All forms of credit have shrunk: credit cards balances led the way with a reduction of 13.1%, or $9.91 billion. That’s eleven months in a row consumers have reduced credit card debt.

I suspect we have a long way to go before consumers feel that their debt to income relationship is strong enough to indulge in a round of debt financed buying. Consumer confidence still is weak and the job outlook grim. Couple them with weak wage growth – if any at all – and the possibility of spending being augmented by increased debt is very low. That means consumption will track closely to income growth, and since wages are under pressure, I think we can feel confident in assuming this recovery will not be led by a surge in buying by regular families.

That puts the emphasis on investment by businesses … where the current outlook is very weak also.

More stimulus anyone?