Consumer debt level shrinks; first drop on record

The Baltimore Sun

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 a bit murky.

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 yesterday.

Economists say consumers appear to be curbing their spending and displaying a healthier prudence about taking on new debt.

What economists don't know is whether Americans 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 by them by the unavailability of credit," said Vincent Reinhart, a former senior Fed economist who is now a fellow at the American Enterprise Institute.

The Federal Reserve reported that household debt declined by 0.8 percent in the third quarter, mostly as a result of a 2.4 percent decline in mortgage debt. Other consumer debt, which includes credit card debt, rose by a modest 1.2 percent.

Moreover, the Fed noted that household net worth continued to decline in the same quarter, largely because of shrinking home equity. Homeowners now own just 44.7 percent of the value of their homes. Until earlier this year, that percentage had not fallen below 50 percent since 1945.

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.

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