How Tight Has Your Wallet Become? - December 11, 2008

Exactly how bad is our country’s economy? With the massive devaluations of homes, along with monumental losses within the stock markets, Americans have decreased their personal debt spending for the first time ever.

In a report released by the Federal Reserve earlier today, households have curtailed their debt levels by 0.8% during the 3rd quarter. The report also showed that the average households’ net worth declined by 4.7% during the same time. Net worth has declined throughout the last four quarters.

As for consumer credit, it advanced at a slowed rate of 1.2% annually, compared to the 3.9% increase from the 2nd quarter. Consumers also saw the growth in home mortgage debt recede to an annual rate of 2.4%, down from a 0.1% drop in the previous quarter. The 2.4% decline marked the largest drop ever in home mortgage debt.

Net worth totaled $56.54 trillion during the 3rd quarter, down from $59.35 trillion in the 2nd quarter. During the 2nd quarter, net worth decreased by 0.7% from the 1st quarter. Read more about the decline in households’ net worth at Bloomberg.

"Consumers are going through a major change in their spending and savings habits," stated Lyle Gramley, a former Fed Governor. "Throughout the housing bubble, consumers had a savings rate of zero, relying on the rising price of their homes. Now they're saving money for the future instead of spending it."

The data also showed that non-financial debt, a.k.a. “flow of funds,” increased more than 7% in the 3rd quarter, up from the previous quarter’s increase of only 3.2%. These non-financial debts represent the governments borrowing figures.

In the same regards as the “flow of funds,” non-financial borrowing by businesses grew at a much slower rate during the recent quarter at a rate of 2.9%. Down from the prior quarter’s borrowing rate increase of 5.6%.

For the 3rd quarter, the total amount of outstanding non-financial debt equated to $32.98 trillion, up from $32.39 trillion in the 2nd quarter.

Outside of personal debt and net worth, the government’s debt rocketed higher in the 3rd quarter, jumping 39.2%, its largest increase ever. It also followed the miniscule 5.9% increase the quarter before.

State and local government debts increased as well, but on a much smaller scale. For the quarter, their debts advanced at a 2.9% annual rate, coming off a 0.8% growth in the previous quarter.

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