Customers are making more retail purchases, but they’re still paying down debt, not adding more.
WASHINGTON – After several years in the wilderness, the American consumer is back. Well, sort of.
A number of economic indicators point to an increase in consumption suggesting that the consumer, who drives much of the U.S. economy, is willing to loosen the purse strings. Banks report more requests for credit. Car sales are surging. The fortunes of many retailers are improving.
Less clear, however, is to what degree Americans are going to be willing to take on more debt and spend more freely. The psychological scars left by the devastating financial crisis of 2008 and the Great Recession remain.
“Part of this story, beyond this month or this quarter, is the new austerity within the consumer market — both paying off debt and building up savings. That’s not going to go away,” said Ken Goldstein, an economist with the Conference Board, a New York-based research group. “It may ease up a bit, but we’re not going back to pre-Great Recession. That world is done.”
In that prerecession world, consumption accounted for about two-thirds of U.S. economic activity. Almost a decade of easy lending led consumers to buy more home than they thought possible, borrow heavily against their homes, rack up huge credit card debt and live beyond their means.
The financial crisis and deep recession brought that to a halt. It forced consumers and businesses alike to pay down their debts, sometimes referred to as deleveraging. That’s a fancy way of saying consumers worked to lower their debt-service ratios, essentially the percentage of their disposable income that’s gobbled up by repaying loans.
Here’s where that stands: Federal Reserve data show that in the third quarter of 2007, the peak of their indebtedness, consumers had a debt-service ratio of 14.08 percent. Think of it as $14.08 out of every $100 going to pay off debt.
In the same quarter of 2012, that ratio had fallen to 10.61 percent. Consumers have been shedding debt like a bad habit. That’s good for personal finances, but not so good for an economy driven by consumption.
“The wounds of 2008 and 2009 may be four or five years ago, but they’re still fresh. There are still many people unemployed or underemployed,” said Susan Reda, the editor of Stores, a trade magazine for retailers. “We’ve turned a corner, but they don’t think they’re on Easy Street.”
On the plus side, there’s been a bull market for stocks and rising home prices in much of the nation. Both make some parts of the population feel wealthier.
That psychological benefit runs up against changes in lending, however. Banks require bigger down payments for home purchases, and most homeowners no longer can freely borrow against their home equity.