Consumers dump debt

WASHINGTON --- Consumers reduced their borrowing for the seventh straight month in August, as households worked to pay off debt and banks reduced credit card limits.


Americans are saving more and borrowing less as widespread job losses, stagnant wages and dwindling home values have spurred a move to greater frugality. While that's a positive trend in the long run, economists say, it can weaken the fledgling recovery as consumer spending powers about 70 percent of the economy.

The Federal Reserve said Wednesday that total consumer debt outstanding fell in August by $12 billion, a 5.8 percent annual rate. Wall Street economists expected a $10 billion decline.

That follows a downwardly revised drop of $19 billion, or 9.1 percent, in July, the largest decline in dollar terms on records dating from 1943. July's decrease was the steepest percentage drop since a 16.3 percent decline in June 1975.

"Consumers are clearly becoming much more conservative about their spending habits (and) paying down debts," said Zach Pandl, an economist at Nomura Securities. "This is likely to continue."

The declines reflect both a drop in demand for credit by consumers, and tighter standards among banks and other lenders.

Total consumer credit outstanding is now $2.46 trillion, down about 4.6 percent from its peak in July. The Fed's report covers credit cards, store cards, auto and other personal loans. It doesn't include mortgages or other real-estate related debt.

The retrenchment in August occurred even as consumer spending increased 1.3 percent, according to a report last week from the Commerce Department. That suggests consumers are increasingly buying with cash rather than credit, Mr. Pandl said.

The Cash for Clunkers auto rebate program helped boost personal spending in August. Economists noted that auto loans and other non-revolving debt dropped only 1.6 percent that month, according to the Fed, compared with a 12.6 percent fall in July.

Credit card debt, meanwhile, fell 13.1 percent, its steepest drop since February.