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Written by admin on November 10th, 2009

Impact of Recession on Consumer Credit

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The US economy has started the long slow process of recovery and now many consumers are wondering what it all means for their future. The banks and financial institutions are in much better condition though it’s still not possible to say they are fully stable.

More bank failures are likely to happen in 2010 so consumers need to make sure they keep their money in FDIC insured banks. But a big question remains as to the condition of the credit industry. Will consumers be able to get things like auto loans, personal loans, equity loans and so on?

Pick up the newspaper on any day, and there’s sure to be an article about tight consumer credit markets. Members of the National Association for Business Economics reported it believes that financial markets will be weak and slow down the progress of economic recovery until well into 2011. In the meantime, consumers are borrowing less for a couple of reasons.

First is the fact that underwriting standards have been severely tightened. This makes it harder for consumers to borrow money unless they have near perfect credit. Second is the fact banks are pursuing consumer loan business much less aggressively. Before the recession it was not unusual for consumers to find advertisements from financial institutions begging for their loan business. The number of credit cards being issued and the available credit have been reduced also while some consumers have stopped using charge cards on a regular basis.

Another reason consumers are borrowing less is due to the fact so many are unemployed or working reduced hours. Consumer credit in the US fell in August by 5.8 percent on an annualized basis. This number includes government programs that spurred borrowing such as the Cash for Clunkers auto program.

Consumers are now saving more money and borrowing less as they adjust household budgets to fit reduced income levels. In addition, the recession wiped out $11 trillion of consumer assets. Retirement accounts, savings accounts, stocks, bonds and all the other types of typical consumer investments have fallen. Now it is time for consumers to begin a personal recovery process to restore some, if not all, of what they lost. That is not going to be easy though and will be the same long slow recovery process the bigger US economy is experiencing.

This is a catch-22 situation though. For the recovery to reach full speed it is necessary for consumers to spend money. But they are not going to spend money at previous levels when trying to reduce household debt. Currently the amount of household debt exceeds household income by 29 percent. In other words, debt is 129 percent of income. This is not sustainable and explains why consumers are working diligently to reduce their debt while saving more.

Unfortunately, the unemployed have often had to go deeper in debt while trying to hold things together financially. They have depleted savings accounts and borrowed against credit cards or used equity lines of credit that were available. Clearly it will take a long time for consumer spending patterns to return to normal.