U.S.: Fed reports 5% increase in household debt

greenspun.com : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

Headline: Fed: Consumers Less Willing to Absorb New Debt; Report Suggests Economy Could Suffer

Source: ABC News, 10 July 2001

URL: http://abcnews.go.com/sections/business/DailyNews/stark_debt010709.html

Personal debt is beginning to haunt the nation.

The Federal Reserve Bank reported today that American consumers added $6.5 billion to their personal debt in May, an increase of nearly 5 percent. At the same time, people are borrowing at a slower rate than they have in the past 1½ years. This is not necessarily a good thing, in that the slowdown reflects people's insecurity about growth in the economy.

It's a vicious cycle for many Americans and it's bad for the economy as a whole. Consumer spending accounts for two-thirds of the economy's growth, so it's always important. But this year it's been the economy's salvation, which is why any sign that it's slowing is so worrisome.

Consumers Kept Economy Out of Recession

American consumers have amazed the experts this year with their willingness to spend.

"Without consumers continuing to spend, the economy would have been in recession months ago," said Mark Zandi of Economy.com.

The problem is they have paid for that spending by going into a record amount of debt. The typical household now carries an average credit card balance of $8,100, almost three times what it was a decade ago. On average, Americans are spending up to 20 percent of their incomes paying off their debts.

As long as the stock market was booming and unemployment was at 30-year lows, consumers were able to manage that debt.

"Consumers are the most reliable cog in this economic machine," said David Orr, chief economist at First Union. "If they have a job and a raise, they'll spend the money. But once you take their job away from them they're not able to spend any longer, and that becomes a vicious cycle pulling the economy down even further."

Economists see that vicious cycle at work in today's report from the Federal Reserve that consumers in May racked up debt at the slowest pace since the end of last year. They say as more workers lose their jobs, or worry about losing them, they are borrowing less and spending less, and that has the potential to hurt anyone who sells anything.

-- Andre Weltman (aweltman@state.pa.us), July 10, 2001

Answers

That's a horrendous leap--5% in just one month. Bad news, indeed.

-- Uncle Fred (dogboy45@bigfoot.com), July 10, 2001.

Moderation questions? read the FAQ