Wednesday 3rd of March 2021

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Debt Levels Fall for Many Consumers

Although the United States is in the middle of a recession, there is some good news. Jobless levels for July dropped to 9.4%, from 9.5% in June. Those that are employed have been working more hours and have seen an increase in their wages. Along with a slight turn in the unemployment rate, consumers have been paying down their debts. The Federal Reserve has reported that consumer debt has fallen for five months in a row. Americans are spending less and saving more. In some cases, the market has forced consumers to reduce their debt by making credit less accessible. In other cases, consumers have chosen to pay down what they owe and have been spending less. This has caused lackluster sales at retailers nationwide, but may result in a stronger economy in the long run.

A Look at the Numbers

The total debt held by consumers was reduced by $10.3 billion in June, which is a reduction of almost five percent. Experts expected that the rate would fall by only $4.7 billion. Consumers cut their debt levels in May by 2.6 percent, and by 8.2 percent in April. These figures do not include mortgage debt or home equity loans. Americans have been saving more too. Between April and June, the American savings rate went up to 5.2 percent, which is the highest that it has been since 1988.

Reasons for Debt Reduction

A few factors have led to the reduction in consumer debt. Some families have been paying down their credit cards and have been saving more because they are concerned about the economy and their job prospects. Many families that have seen job losses, have had their home values decline, or have seen the values of their mutual funds decline have chosen to cut back in their spending. Other individuals have been denied credit, as market forces have made it more difficult to get automobile and signature loans. Credit card companies have also been canceling customer accounts and have been lowering credit limits.

Retail Effects of Frugality

Retail outlets had weak sales in July, as consumers continue to save instead of spend. For the short term, as long as Americans continue to avoid using their credit cards, retail sales will continue to lag. However, as the balance sheets of households improve and families pay off credit cards, retail sales could perk up again. As the jobless rate declines, consumers may begin to feel more confidence, which could get them to start spending again.

The Light at the End of the Tunnel?

With a reduction in the unemployment rate, increased savings levels, and employees working more hours and making more money, perhaps the American economy will start to turn around soon. Although retail sales have continued to contract, it is likely that they will start to improve, as long as the other signs of recovery continue. Companies that have postponed hiring new employees may be more willing to hire again if it begins to look like better times are ahead. Additional confidence on the consumer’s part may also cause more spending, which could further pull the economy out of the recession.