Consumers Coming Back, But They May Not Run Up Credit Cards

Credit cards and consumers 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 pre-recession 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, many economists say, 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 outstanding 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.?

Another Fed statistical release, covering a 12-month period through last December, shows that consumer credit grew by an annual rate of 6.5 percent. But within that overall number, revolving consumer credit ? which is credit cards and other loans that don?t have fixed payment schedules ? grew by an annual rate of just 0.1 percent.

That razor-thin improvement beats 2009, when revolving credit plunged for the year by 8.8 percent, followed by a decline of 7.4 percent in 2010 before creeping back up slowly in subsequent years.

?The consumer seems to stay in the game. We never expected them to fall off the beam,? said Jack Kleinhenz, the chief economist for the National Retail Federation, which represents national retail chain stores.

But it?s unlikely that retail sales will return to the go-go days of 2003 or 2004 because consumers still face job insecurity and general angst about the nation?s direction. The expiration on Dec. 31 of the payroll-tax holiday means that all workers are giving Uncle Sam a greater share of their earnings. The ongoing tax and spending battle also dampens consumer sentiment.

This is seen in sluggish retail sales, which grew by a slim 0.1 percent in January, according to data the Census Bureau released Wednesday. Compared with January 2012, however, retail sales were up 4.4 percent, and total sales from November 2012 through the end of January 2013 were up 4.5 percent from the same period a year earlier. It points to a slow, modest rebound that mirrors the monthly average increase in employment of 180,000 new jobs per month.

Steady, but hardly stellar. The retailers? group expects sales growth of about 3.4 percent this year, up but a slower pace than the 5.2 percent in 2012.

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, at least on paper, and boost consumer confidence.

That psychological benefit runs up against changes in lending, however. Banks require bigger down payments for home purchases, and homeowners no longer can freely borrow against the equity they?ve built up in their homes.

?I definitely think the results of the recession will change the habits of consumers, because they won?t be able to borrow as freely as they did 10 years ago,? Kleinhenz said. ?We know that consumer credit has been increasing, but they are very guarded in not keeping too many balances.?

Auto loans make up much of the borrowing, inflating the overall retail sales numbers. January light-vehicle sales were on a pace for a 2013 annual volume of 15.29 million cars and trucks, according to, an industry research group. In 2009, 10.4 million light vehicles were sold, a 30-year low.

?The happiest people at a bank right now are in the auto financing section,? said Richard Hunt, the head of the Consumer Bankers Association, said Thursday in a conference call with reporters.

Banks are sitting on $10 trillion in deposits and are eager to lend, Hunt said. But since the Great Recession, consumer demand for loans has been weak, improving slightly in recent months.

?There was a crisis, people were severely impacted by it and course they?re going to be more cautious going forward,? said Tim Pawlenty, a former governor of Minnesota who?s the head of the Financial Services Roundtable, the lobby for big banks.

Source: MCT Information Services