Americans may be -- just maybe -- getting serious about paying off their debt.
The evidence so far is spotty and far from conclusive, but there’s enough to intrigue some economists who wonder if consumers finally are starting to abandon their wanton, borrow-and-spend ways.
The Federal Reserve tells us, for example, that consumer credit grew at an annualized pace of 4.5% during the first three months of the year -- compared with 9% to 10% growth during the same period for the prior three years. Non-revolving credit such as car loans showed a particularly steep drop quarter to quarter, from a 15.1% growth rate in the fourth quarter of 2001 to a 6.4% pace in the first quarter of 2002.
A lot of the year-end growth, obviously, was consumers snapping up those low-interest car deals. But growth in credit-card debt is also slowing. Consumers boosted their borrowing via plastic by just 1.9% in the first quarter, compared to 13% in the same period a year ago.
The average balance on credit cards, meanwhile, seems to be dropping. At the end of last year, the average balance per card was $1,930, according to credit card trackers Auriemma Consulting Group. By April, it was $1,402 -- a $528 difference. Balances usually drop after the end of the year, as people pay off their holiday binges, but last year the average balance fell by less than $200 during the same period.
Average U.S. Credit Card Debt Per Household
(includes all credit cards and U.S. households with at least one credit card)
Year Debt
1990---$2,985
1991---$3,223
1992---$3,444
1993---$3,601
1994---$4,811
1995---$5,832
1996---$6,487
1997---$6,900
1998---$7,188
1999---$7,564
2000---$8,123
2001---$8,367
Source: CardWeb.com, Inc. (www.cardweb.com)
“Consumer credit growth has been a lot slower this year than in previous years,” said Scott Strumello, an Auriemma analyst. “Consumers seem to be a little bit reluctant to add to their credit-card debt.”
Consumers shift the debt load
In the past few years, people have shifted some of their debt from credit cards to their home equity, through refinancing or home-equity loans. Strumello is skeptical that such a shift could explain away the drops he’s seeing, however. Most people who borrow against their home equity continue to run up debts on their credit cards, and the big binge in mortgage refinancing happened last year -- not in the first quarter.
Auriemma researchers found something else intriguing. The number of people who said they frequently carried a balance on their credit cards dropped from its usual range of 30% to 34% to just 25% in April. Meanwhile, the folks who claimed they never carried a balance rose from 38% to 45%.
These figures should be read with some caution. April’s numbers were based on interviews with a group of just 400 people, compared to Auriemma’s usual quarterly sample of 1,300. That could account for much of the difference between the two sets of figures. Still, Auriemma’s consultants believe they’re seeing a trend.
So, too, do the people behind the Cambridge Consumer Credit Index, which polls 1,000 households each month about their borrowing and spending. The index, which was launched by International Communications Research (ICR) of Media, Pa., in December, is too new to give us any meaningful historical data. Still, its analysts believe they may have stumbled across something interesting.
The index asks whether people have borrowed more, or paid off debt, in the past month, and what they plan to do in the next month as well as six months from now. While people’s short-term actions and plans haven’t changed much in the past few months, the index responded dramatically when people were asked about their future plans.
In May, only 31% said they planned to take on more debt for a major purchase such as a car, education or medical or household expenses in the next six months. In April, the figure had been 39%.
At the same time, 69% of those polled in May said they planned to pay off debt, compared with 61% in April.
When crunched through the index’s formula, those responses translated into a 16-point drop in the index, to a level of 62, compared with 78 on the same question in April. That’s the biggest change in the index’s short history, said ICR economist Allen Grommet. “We saw a lot more caution this time,” Grommet said. “The longer the recovery takes, the more cautious people are getting.”
Grommet doesn’t claim the index is predictive. People’s plans for and feelings about the future can always change, as we should know from the notoriously fickle consumer confidence indices.
Economists worry about a slowdown
If this newfound fiscal conservatism persists, however, there could be a variety of repercussions. For example, the Fed may be less likely to raise interest rates if consumers actually borrow and spend less.
Among those who think that consumer borrowing is just taking a breather is Sung Won Sohn, chief economist for Wells Fargo Bank. “Consumer credit demand is still pretty healthy,” said Sohn. Consumers clearly have some concerns about unemployment and a sluggish economy, he said, but they’ve managed to overcome such worries pretty quickly in recent years.
The idea that consumers might actually spend less is, of course, anathema to many economists. Since consumer spending accounts for two-thirds of the U.S. economy, these experts fear any significant slowdown in spending means a puny recovery -- or, heaven forbid, a tumble back into recession.
Some economists, however, are willing to at least consider the idea that less consumer borrowing might be a good thing -- both for families and for the economy in the long term.
Our borrowing binge, after all, helped lead to a record 1.45 million bankruptcies last year, and debt counseling seems to be one of the true growth industries in an otherwise middling economy.
---Posted 5/16/2002--- |
