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The
Virtuous Consumer
The
American consumer appears to be putting down the credit card and picking up a
passbook.
After ratcheting up debt to record levels in recent years, Americans cut their
credit-card debt by $8.4 billion in December 2002, the largest monthly decline
since recordkeeping began in 1968. And it wasn’t an anomaly. Credit-card debt
rose just 1.6 percent in 2002, compared with 5 percent in 2001 and 11.5 percent
in 2000. Meanwhile, the savings rate began to climb after falling to below 1
percent in the fourth quarter of 2001.1
What are the possible reasons for this trend? How does it bode for the economy?
Consider these causes and effects.
 Low
Interest Rates
The current low cost of money is almost certainly contributing to the debt
decline. As people have refinanced mortgages and shifted to zero-interest auto
loans, they have freed up cash that may be going to pay down personal debt. The
prevalence of zero-percent introductory rates on credit cards also may be aiding
faster repayment.
Disappointing Financial Markets
The personal savings rate had reached 4.3 percent by the end of 2002, a sharp
contrast from the 0.8 percent rate at the end of 2001.2
The trend is reflected in the balance of U.S. savings deposits and money market
funds, which reached $4.6 trillion in January 2003, about $300 billion more than
a year earlier.3 Some experts believe that
recent stock market volatility is linked to the buildup of cash, which may
slowly return to the markets as the volatility eases.
Prepared Consumers
There is speculation that the trend toward debt repayment will offset some
growth in consumer spending this year. Despite the potential short-term
drawbacks, the end result may be consumers who are in a better position to
spend, invest, and contribute to the growth of the economy.
The health of the consumer is critical to the nation’s overall financial
picture. By reducing debt and increasing their savings, consumers may be
preparing their personal balance sheets for many years to come.
1) The Wall Street Journal, February 12, 2003
2) Bureau of Economic Analysis, 2003
3) Federal Reserve, 2003
© 2003 Emerald Publications
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