Lisa Simpson
Jan 20,2010
In: Finance

Consumer Spending Has Dipped to an All-Time Low

The consumers are borrowed even less.

The Americans are on a tight rope walk. In fact, they borrowed even less in November for the 10th month in a row. Even credit card borrowing has dipped. If consumer spending plunges then it would take a while for the economy to bounce back on the growth track.

According to Federal Reserve, borrowing had dipped by $17.5 billion two months ago. This decline is much bigger than what the economists had expected. Why are the Americans borrowing less and less? There are several reasons for this. They are afraid of losing their jobs and do not want their investment levels to go down. The government had cut 85,000 jobs last month. That makes it a total of 8 million job loss ever since the beginning of recession three years ago.

Consumers are also finding it difficult to avail of credit. That is because have tightened the leash on lending. For years, the economists had been worried about the low savings rate. Now they are overtly concerned that the economy could be derailed if the proportion of savings goes up suddenly.

Consumer spending makes up for as much as 70 per cent of the total GDP. The total drop in credit in November is the highest since 1943. That is a sharp fall of 8.5 per cent from the level in October. In fact, that is the highest drop in percentage since 1980.

Credit card borrowing category registered the highest drop – it dropped by $13.7 billion. This was the highest since the 29.6 per cent plunge witnessed in 1974. It may be pointed out that the credit report furnished by the Federal government does not include home loans and property equity mortgage. It includes borrowing which are not secured by the real estate.

The consecutive drop of 10 months in a row is a record. Earlier in ‘43 and ’91, there was a plunge for seven consecutive months. The plunge in credit card borrowing is also a record. In fact, it has dipped for 14 months in a row.

What worries economists further is that the unemployment scenario is still bleak. Employment is at a high level of 10.3 per cent. As people lose jobs even those with very sound credit history will falter on mortgage payments. That would make it difficult for the economy to recover. In fact, the government has come up with several programs to help troubled consumers.