Consumers coming back, but not with credit cards

Austerity learned in Great Recession isn't going away: experts
Phillip Magallon prepares to put NBA All-Star T-shirts on a rack at the TEAM LA store at Staples Center in Los Angeles.MCT

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 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.

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."


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