Friday, May 9, 2008

Consumer Debt Increases By More Than Double Estimates

Consumer debt (excluding home loans) increased by $15.3 billion in March over the previous month, according to a report released by the Federal Reserve. Analysts had only been predicting around a $6 billion increase, so the news came as quite a surprise. The fact that Americans are borrowing and continuing to spend is good news for the economy in the immediate future, but for the long term, the implications aren’t as good. Let’s look at some of the causes of the debt hike and then the potential implications.

It doesn’t take a rocket scientist to figure out why Americans are getting further in debt, but here are a couple quotes:

Americans have had to go into debt to maintain their existing lifestyles, Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, said in a CNNMoney article.

The Commerce Department said that personal spending rose higher than expected in March because of the rising costs of necessities such as food and fuel, even as personal income growth across the country slowed, CNNMoney reported last week.

So Americans want to maintain their lifestyles, but things are getting more expensive, so further in debt they go.

In the near term, people using debt is a good thing for the economy. Consumer spending accounts for around 70 percent of the gross domestic product in the U.S., according to the Associated Press, so any increase or decrease in consumer spending can have a drastic effect on the economy. At the same time, we must understand that debt spending can’t go on forever. There will become a point when people are tapped out and they just cannot borrow anymore. When that happens it will cause a huge pullback in spending and the economy will be hit hard.

I know the idea of there being a limit to the amount of money people can borrow is a hard concept to grasp for Americans, considering we are the nation of debtors, but it is true. Whether we want to believe it or not, in order for there to be a lasting spending increase, wages are going to have to go up. Considering that wage increases haven’t even been keeping up with inflation over recent years, we have a ways to go on that front.

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