More spending could come after consumer credit bottoms out

Experts say that while consumers have scaled back spending and reduced credit card debt, that trend won’t continue forever.

Households have successfully reduced their credit card debt and spending, and at the same time increased the rate at which they’ve built up their savings. That could mean they will be freer to spend that money in the future, according to a new report from Bloomberg. While debt payments have increased in recent months, the amount of disposable income people are putting toward doing so fell in the first quarter and is now near the average observed by the Federal Reserve Board over the last 30 years. That drop is expected to continue at least until the end of the year.

However, other experts are not so optimistic, because economic growth is likely to slow slightly in 2011 and spending is not likely to increase too significantly until the unemployment rate drops below 9 percent, the report said. But those that aren’t spending are putting more into paying their credit card debt and, when lending conditions eventually loosen, more will be in a position to get a new line of credit and boost their spending again.

The report noted that retail sales likely crept up slightly in August – by 0.3 percent – after a similar jump in July. Some economists have seen this as a strong enough sign of recovery that they’ve declared the recession over, even as fears of a relapse persisted.

Consumers successfully saved 5.9 percent of their income in 2009, up considerably from earlier estimates of 4.2 percent, and that rate stayed more or less steady through the first seven months of the year. The report said that this implies more progress than expected in Americans’ finances.

“The consumer has already done a lot of the heavy lifting,” New York-based economist James Glassman told the news service. “I don’t think there is all that much balance-sheet drag ahead.”

Other economists say that the quality of consumer credit has improved rapidly as charge offs continue to slide to pre-recession levels and delinquency experiences even greater drops, the report said.

Often, the rates of charge offs and delinquent credit card debt are closely tied to those for unemployment, but as the latter has stagnated, the former two have slid significantly, leading some to speculate that consumers without a job cannot have been locked out the credit system.