Consumer debt keeps shrinking, voluntarily and otherwise

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Even as the July employment report today provided fresh hope that the recession is ending, new data showed what a huge headwind the economy faces from the continuing squeeze on consumers’ credit.

The Federal Reserve said consumer debt outstanding declined in June for a fifth straight month, falling at an annualized rate of 4.9%, to $2.5 trillion.

The streak of declines now is the longest since 1991, according to Bloomberg News.

Revolving debt outstanding, such as balances on credit cards, fell at a 6.8% annualized rate to $917 billion, the Fed’s report showed. Non-revolving debt, such as auto loans, dropped at a 3.8% rate to $1.58 trillion. The data don’t include mortgages and other loans secured by real estate.

Weak July sales reports from many retailers suggested that Americans weren’t taking on new credit card debt last month, either -- although the ‘cash for clunkers’ program could give a boost to car loans this month.

Two forces are driving the overall shrinkage of consumer debt, of course. First, many people are voluntarily paying down loan balances, and boosting savings, to improve their household balance sheets. That’s encouraging for the economy in the long run because it will leave those consumers in better financial shape.

Second, many banks continue to simply take away individuals’ borrowing power by canceling credit cards and making auto and other personal loans harder to get.

Whatever the reason for it, declining credit use will continue to be a drag on consumer spending, which still is 70% of the economy.

-- Tom Petruno