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Drop in Credit Card Spending Could Signal Problems in Economy Built on Consumer Debt

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Americans took on another $10.9 billion in debt in September, according to data released by the Federal Reserve. That pushed total consumer debt to a seasonally adjusted $3.95 trillion. American indebtedness is growing at a 3.3% rate.

But there are signs that American credit card borrowing is slowing down and that’s not good news in an economy built on consumer spending and debt.

The consumer debt figures include credit card debt, student loans and auto loans, but do not factor in mortgage debt.

The increase in consumer indebtedness came in well below what economists expected, signaling Americans might be slowing down their pace of spending as interest rates creep up. Credit card debt actually dropped in September. Revolving credit levels fell by $312 million. As Bloomberg put it, “That figure, which includes credit cards, shows consumers were staying cautious on running up such debt toward the end of the third quarter.”

The drop in revolving credit reversed a trend we saw over the summer. Revolving credit balances swelled by $4.8 billion in August after a $1.4 billion increase in July.

As Peter Schiff pointed out in a recent podcast, Americans taking on a lot of credit card debt is a bad thing in the long run, but not if you’re counting on the consumption to drive GDP. The American consumer can’t buy in America if they aren’t taking on debt.

If you see a slowdown in the accumulation of debt, it generally means people are not buying as much stuff.”

And while it’s true wages are rising, they are not increasing as fast as the cost of living. The American consumer is actually seeing a decrease in purchasing power.

Right now, to the extent that Americans are cutting back on their credit card debt is basically because they can’t afford anymore. They probably are maxed out and they don’t want more debt.”

An increase in non-revolving debt, which includes auto and student loans, made up for the drop in credit card spending. Non-revolving debt rose by $11.2 billion in September.

An increase in student loans accounted for the bulk of that increase. Student loan debt hit another all-time record high. Student loans outstanding rose by $33.2 billion in the third quarter. Peter said this is another negative for the US economy.

It just means that American students are that much deeper in debt. And of course, if they have more and more student debt, they have less ability to buy other stuff.”

A combination of students taking on more debt – meaning they have less purchasing power after they graduate – and consumers in general not being able to put more things on the credit card indicates both consumer spending and GDP will likely fall in the future.

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