Thread: This has gotta be GOOD NEWS

THE ECONOMY

Debt held by U.S. households shrinks for first time
By Maura Reynolds and Mark Medina
December 12, 2008

Economists don't know whether consumers are bringing down their debt voluntarily or whether it's being imposed on them through foreclosures or the denial of credit.

Reporting from Washington -- The American consumer's long-running love affair with debt appears to be on the rocks. But like a lot of soured romances, the reasons are open to debate.

What's known is that the debt held by U.S. households shrank in the three months ended Sept. 30. That's the first time that has happened since the government began keeping records more than 50 years ago, the Federal Reserve said Thursday.


Shrinking debt

Economists say consumers appear to be curbing their spending and displaying a healthy prudence about taking on new debt -- something financial planners have been admonishing Americans to do for decades.

What economists don't know is whether people are bringing down their debt voluntarily or whether it's being imposed on them through foreclosures or the denial of credit.

"While it's good that households are beginning to save, it's much more likely that this is being imposed on them by the unavailability of credit than any desire to sustain their balance sheets over the long run," said Vincent Reinhart, a former senior Fed economist who is now a fellow at the American Enterprise Institute.

Household debt declined 0.8% in the third quarter, mostly as a result of a 2.4% decline in mortgage debt, the Fed reported. Other consumer debt, which includes credit card debt, rose a modest 1.2%.

The Fed also noted that household net worth continued to decline in the same quarter, largely because of shrinking home equity. Homeowners' equity as a percentage of the value of their homes has fallen to just 44.7%. Until this year, that percentage had not fallen below 50% since 1945.

"You don't have the house to borrow from anymore," said Joel Naroff, president of Naroff Economic Associates in Holland, Pa.

"The fact that net worth is going down means that people are feeling poorer and poorer and are cutting back by saving rather than borrowing," Naroff added. "The question is whether this is a long-term change in philosophy" or just short-term austerity.

But it's also true that Americans are saving more. The savings rate, a meager 0.2% in the first three months of the year, rose to 1.1% for the third quarter.

With the nation in recession and unemployment rising, many people are simply cutting back as a precaution.

"I have to be careful with money because of what's going on in the economy," said Marsha Phillips, 48, a single mother who works as a janitor at the YMCA in Burbank. "I'm on a budget."

Phillips said she had cut back on such luxuries as eating out and buying DVDs. Now she goes out no more than once a month.

"My bills never got paid on time, and they racked up," Phillips said. "I'm on an even keel now."

Adam Ziegler, a 26-year-old graphic designer from West Hollywood, said he was planning to spend $30 or $40 for each person on his holiday shopping list, down from $50 or so in years past. He's eating out less and spending less time in nightclubs.

"I've been only going out a little bit and not drinking as much," Ziegler said.

Ofelia Cruthirds, 43, of Fontana is also slashing her holiday gift budget. With eight sisters and five brothers, Cruthirds said she had usually spent $1,000 a year on Christmas gifts for her siblings and her dozens of nieces and nephews. She plans to spend less than $500 this year.

"I'm not buying anything with a credit card -- we're trying to get the debt down," she said. "The economy won't get better soon. Too many people are losing their jobs."

In a survey by the Pew Research Center, 73% of Americans said they had cut back on holiday spending. Of those, 28% said they were doing some belt-tightening because their economic situation had already deteriorated and 59% said it was because they feared their economic fortunes would get worse.

Bad economic news continues to mount, stoking such fears even more. The government reported Thursday that the number of new jobless claims from U.S. workers hit a 26-year high last week, and the U.S. trade deficit unexpectedly worsened despite lower costs for imported oil.

"The widening trade deficit shows just how much the global slowdown is hurting U.S. exporters," Naroff said. "The picture of the economy just keeps getting uglier."

Economists are now predicting that the economy, which has been in a recession since last December, will show a steep decline in gross domestic product of 5% or more in the fourth quarter. The last time the country had a recession this deep was the early 1980s.

"People overbought during the last expansion. That's clear," said Gus Faucher of Moody's Economy.com. "People need to better align their incomes and their spending, and this is part of that process. But it's going to be trouble for the economy in the meantime."

Faucher said economists talked about the "paradox of thrift" -- meaning that for the economy to grow over the long term, consumers needed to save and accumulate assets. But when the economy falters, an increase in consumer saving tends to deepen the decline because the economy is so dependent on consumer spending.

When banks begin lending again, Faucher said, he expects consumer spending to pick up. But he doesn't think consumers are going to return to their habits of spending more than their incomes -- what economists call "negative savings" -- on the expectation that the value of their homes would grow fast enough to more than make up the difference.

"We have a kind of permanent shift taking place in household behavior," Faucher said. "We think the savings rate is going to become positive and stay positive."

Reynolds is a reporter in our Washington bureau.
Medina is a Times staff writer.

latimes.com

Geez, Mid, it would be nice if you summarised and made an opinion on this stuff. I read this already on the net.

Its not what the government wants though.

^ But you never post your bladdy opinion on stuff!

This has gotta be GOOD...13-12-2008 01:43 PMJet Gorgonpost your opinion on the news, not just the news, altho I do appreciate you trolling the net for us


ain't you a piece of work

^ Middie, you do so much good news foraging (really do appreciate it as you find some great breaking info), but sometimes it's a bit OTT is all, IMO. Would rather have a summary, your views, and a linkie if I want to go there.

To answer Mid's opine about this being good news, it is not. It is a critical point in massive debt deleveraging in the US.

The debt monster literally is eating itself.

Originally Posted by bkkandrew

To answer Mid's opine about this being good news, it is not. It is a critical point in massive debt deleveraging in the US.

The debt monster literally is eating itself.

bills gotta be paid no ?

can't keep on increasing debit forever can you ?

so good news , sure pain now but a better foundation for the future rather than leaving the bill to our children .

^For sure the bills have to be paid. They should never have even got to a fraction of what came to pass. But this is missing the point - the current phenominon of monetary destruction through debt deleveraging creates the very deflationary environment where the debt cannot and will not be repaid.

Entirely predictable, predicted by some and disasterous for many.

But this is missing the point - the current phenominon of monetary destruction through debt deleveraging creates the very deflationary environment where the debt cannot and will not be repaid.

kinda understand this , and agree that we should have never got here in the first place , but that's hindsight 'cause here we are .

so if decreasing debit is bad how to solve ?

^To the current extent, not solvable. Ergo FED default, collapse of USD and a rout for the US economy. Ditto for Ponzi Brown's Island and a number of Euroclub members.

Originally Posted by Jet Gorgon

^ Middie, you do so much good news foraging (really do appreciate it as you find some great breaking info), but sometimes it's a bit OTT is all, IMO. Would rather have a summary, your views, and a linkie if I want to go there.

Agree with you Jetie!

Mid is fantastic, and at getting all the latest news to us which I am sure we all appreciate.

But it would be nice to read the opinions of the man behind "the cut and paste headlines" as well.

I am sure he has some interesting views!

^^

New World Order , Ruskies seem to think it's forgone , what happens to the Chinese under that scenario ?

ie , can China survive an American bankruptcy ?

^No. They have stated previously that civil stability in China requires a minimum growth level of 8%. The unfolding events in the US will mean Chinese growth IRO more like -8%...

Originally Posted by Mid

ie , can China survive an American bankruptcy ?

I am not sure whether an American economic meltdown is going to affect China long term.

Both are self sufficient economy's in their own right with America only aggresively opening up to real international trade and in the last couple of years.

I cannot see consumer debt in the US having a long term adverse affect on China and in fact Asia in general.