Spending Facts - Consumer Debt Hurts the Economy

Are you a Threat to Our Nation’s Economy? Experts warn that increasing personal debt among U.S. consumers poses a severe threat to the nation's economy.

U.S. consumers who once saved an average of 8% of their take-home pay now spend about 1% more than they earn. Payments on personal debt for such things as credit cards and student loans once totaled less than 6% of after-tax income. Now, at its highest level in more than a decade, that figure is at nearly 8%, and still rising.

"What we have here is a dangerous mix of fast-growing debt and fast-rising unemployment that could quickly put the brakes on consumer spending," said John Lonski, chief economist at Moody's Investor Services. Lonski’s warning translates into a possible epidemic in the level of recorded bankruptcies.

Making things worse is the fact that more families are falling behind on credit card payments. The nation's delinquency rate has grown steadily to well over 5%, with more than one account in every 19 being delinquent. Falling behind on revolving credit and consumer loans inevitably results in increased fees, interest charges, and penalties for the rest who makes their payments on time. These added charges increase the burden of public debt making it more difficult to pay-off consumer loans and credit.

This disturbing trend is prompting more Americans to seek counseling to slash their spending in an attempt to reduce their debt. "We normally see an increase in the month of January," said Kathleen McNally of National Federation for Credit Counseling. The annual January spending hike is sometimes called the January jump. But McNally said this year's January jump is continuing into the month of May. One family sought help with credit counseling only to find it was too late. L& T from St. Agatha, ME realized they were in serious financial trouble when they could no longer keep refinancing their loan at the local Credit Union in order to make ends meet. Each time they refinanced they increased their monthly debt to income ratio. By the time they sought credit counseling they owed in monthly debt payments an astounding 25% more than they had for monthly income.

The Labor Department reports that in 2001 businesses cut a stunning 223,000 jobs (outside the farm sector) in April alone—the biggest one-month drop since the end of the last recession in February 1991. Massive layoffs and employee reductions cast an economic cloud of gloom in the financial pockets of America. The economic cloud of gloom signals a waning economy and instability in job security. One of the victims of the slowing U.S. economy is Robert Gotsch of Baldwin, Georgia, who found himself laid off this month and caught with $73,000 in personal debt. Since he lost his job, Gotsch and his wife Lynna have been struggling to maintain their monthly payments.

"We have sold everything we can imagine: computers, my rollerblades," said Lynna Gotsch. "We've gone to flea markets, sold clothes, done without cable, commuted together to save gas and car expenses, and are living with family."

With no house of their own, the Gotsches live with Lynna's grandmother.

The story of the Gotsches is not unusual as more and more American consumers are finding out the hard way just how hopeless it can be to get out from under a mountain of debt.