The high unemployment rate and tight credit markets have caused consumers to decrease their spending which has many economists fearing that an increase in savings will derail the U.S. economy. Since spending accounts for 70 percent of the United States’ total economic activity, the rapid decline in spending has hurt everyone from retailers to banks. Many consumers have been hesitant about spending because of rising unemployment which has reached 10 percent and the reluctance of banks to extend or even keep open many existing lines of consumer credit.
In September, borrowing for revolving credit, including credit cards, fell at an annual rate of 13.3 percent, a record 12th consecutive decline. Borrowing for non-revolving loans, including auto loans, fell at an annual rate of 3.7 percent after a slight increase in August. The August gain reflected the surge in car sales as consumers rushed to take advantage of the government’s Cash for Clunkers program.
There may be another increase in consumer activity in the housing market as many consumers take advantage of the housing tax credit and purchase homes relieving, at least temporarily, some of the pressure off the housing crisis. However, this type of spending may not be enough to help the economy make a full recovery. And purposely decreasing the consumer savings rate may not be a wise long-term strategy as job losses continue across most sectors. One of the causes of the foreclosure and credit crisis is that many consumers failed to create a savings cushion that could sustain them in case of a job loss. When a job loss occurred they were unable to sustain their standard of living for even a few months, eventually facing foreclosure and bankruptcy. If we fail to increase consumer savings this time around we may be facing another crisis in the future.