The American consumer’s long-running love affair with debt appears to be on the rocks. But like a lot of soured romances, the reasons are open to debate.
What’s known is that the debt held by U.S. households shrank in the three months ended Sept. 30. That’s the first time that has happened since the government began keeping records more than 50 years ago, the Federal Reserve said Thursday.
Economists say consumers appear to be curbing their spending and displaying a healthy prudence about taking on new debt -- something financial planners have been admonishing Americans to do for decades.
What economists don’t know is whether people are bringing down their debt voluntarily or whether it’s being imposed on them through foreclosures or the denial of credit.
“While it’s good that households are beginning to save, it’s much more likely that this is being imposed on them by the unavailability of credit than any desire to sustain their balance sheets over the long run,” said Vincent Reinhart, a former senior Fed economist who is now a fellow at the American Enterprise Institute.
Household debt declined 0.8% in the third quarter, mostly as a result of a 2.4% decline in mortgage debt, the Fed reported. Other consumer debt, which includes credit card debt, rose a modest 1.2%.
The Fed also noted that household net worth continued to decline in the same quarter, largely because of shrinking home equity. Homeowners’ equity as a percentage of the value of their homes has fallen to just 44.7%. Until this year, that percentage had not fallen below 50% since 1945.
“You don’t have the house to borrow from anymore,” said Joel Naroff, president of Naroff Economic Associates in Holland, Pa.
“The fact that net worth is going down means that people are feeling poorer and poorer and are cutting back by saving rather than borrowing,” Naroff added. “The question is whether this is a long-term change in philosophy” or just short-term austerity.
But it’s also true that Americans are saving more. The savings rate, a meager 0.2% in the first three months of the year, rose to 1.1% for the third quarter.
With the nation in recession and unemployment rising, many people are simply cutting back as a precaution.
“I have to be careful with money because of what’s going on in the economy,” said Marsha Phillips, 48, a single mother who works as a janitor at the YMCA in Burbank. “I’m on a budget.”
Phillips said she had cut back on such luxuries as eating out and buying DVDs. Now she goes out no more than once a month.
“My bills never got paid on time, and they racked up,” Phillips said. “I’m on an even keel now.”
Adam Ziegler, a 26-year-old graphic designer from West Hollywood, said he was planning to spend $30 or $40 for each person on his holiday shopping list, down from $50 or so in years past. He’s eating out less and spending less time in nightclubs.
“I’ve been only going out a little bit and not drinking as much,” Ziegler said.
Ofelia Cruthirds, 43, of Fontana is also slashing her holiday gift budget. With eight sisters and five brothers, Cruthirds said she had usually spent $1,000 a year on Christmas gifts for her siblings and her dozens of nieces and nephews. She plans to spend less than $500 this year.
“I’m not buying anything with a credit card -- we’re trying to get the debt down,” she said. “The economy won’t get better soon. Too many people are losing their jobs.”
In a survey by the Pew Research Center, 73% of Americans said they had cut back on holiday spending. Of those, 28% said they were doing some belt-tightening because their economic situation had already deteriorated and 59% said it was because they feared their economic fortunes would get worse.
Bad economic news continues to mount, stoking such fears even more. The government reported Thursday that the number of new jobless claims from U.S. workers hit a 26-year high last week, and the U.S. trade deficit unexpectedly worsened despite lower costs for imported oil.
“The widening trade deficit shows just how much the global slowdown is hurting U.S. exporters,” Naroff said. “The picture of the economy just keeps getting uglier.”
Economists are now predicting that the economy, which has been in a recession since last December, will show a steep decline in gross domestic product of 5% or more in the fourth quarter. The last time the country had a recession this deep was the early 1980s.
“People overbought during the last expansion. That’s clear,” said Gus Faucher of Moody’s Economy.com. “People need to better align their incomes and their spending, and this is part of that process. But it’s going to be trouble for the economy in the meantime.”
Faucher said economists talked about the “paradox of thrift” -- meaning that for the economy to grow over the long term, consumers needed to save and accumulate assets. But when the economy falters, an increase in consumer saving tends to deepen the decline because the economy is so dependent on consumer spending.
When banks begin lending again, Faucher said, he expects consumer spending to pick up. But he doesn’t think consumers are going to return to their habits of spending more than their incomes -- what economists call “negative savings” -- on the expectation that the value of their homes would grow fast enough to more than make up the difference.
“We have a kind of permanent shift taking place in household behavior,” Faucher said. “We think the savings rate is going to become positive and stay positive.”