Fed Says Household Debt is Shrinking...That May Not Be Good.

The Fed says Americans aren't borrowing as much as the used to, but it may be because they can't.

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Consumers are cutting back on debt, but it's not entirely by choice, say experts.

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American consumers have cut back on debt in a big way, but it's not entirely good news.

A report released this week from the Federal Reserve's Survey of Consumer Finances shows that Americans cut their debt in several ways during and immediately after the Great Recession. Even while incomes fell from 2007 to 2010, Americans didn't use plastic to compensate and spend more. While 46.1 percent of families had credit card debt in 2007, carrying a median balance of $3,100, only 39.4 percent had credit card balances in 2010, with a median balance of $2,600. Home-secured debt also fell slightly—in 2010, 47 percent of families owed a median of $109,600 on their primary residences, compared to the nearly 49 percent who owed a median of $112,100 three years earlier.

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Another recent report from the Federal Reserve Bank of New York shows that total household debt declined from nearly $12.7 trillion in 2008 to $11.4 trillion as of the first quarter of 2012, and that delinquencies are also down substantially. Still, plenty of less comforting facts underlie this trend, meaning that it's too soon to say that Americans have gotten better at managing debt.

"Part of the reduction in liability on household balance sheets is related to defaults," says Beata Caranci, vice president and deputy chief economist at TD Bank Financial Group. "If you default on your mortgage, you no longer have that liability."

Indeed, mortgage debt makes up the vast majority of Americans' household debt, so a decline in home ownership means less debt, even as it also means a drag on the economy, as salable homes sit empty.

Like mortgage debt, credit card debt has also been declining recently. But once again, that does not necessarily reflect more responsible spending; indeed, it may reflect cautious banks and unattractive customers.

"Not having a job, that automatically reduces your accessibility [to credit]," says Caranci. That means that even those without a paycheck, who may need credit cards more than ever, may be unable to get them.

But banks are also helping to bring down credit card use, she says.

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"On top of it, banks are being more conservative in the sense of having suffered financial losses related to delinquencies. That would have been transferred over through not much accessibility on the credit side."

Another unsettling trend accompanying a decline in debt is that Americans are saving less. The Fed's Survey of Consumer Finances shows that the percentage of families who said they had saved in the past year fell from 56.4 percent in 2007 to 52 percent in 2010.

And the amount they have saved has been tapering recently as well. Americans saved less than 2 percent of their disposable income in all four quarters of 2005, according to the Department of Commerce. While that spiked above 6 percent at the height of the recession, it has since then tapered off. The quarterly savings rate was at 3.6 percent in the first quarter of 2012. That's still higher than the measly pre-crisis levels, but it's the lowest level seen since the fourth quarter of 2007, just before the recession began.

On the one hand, this may simply reflect that Americans have been too cash-strapped to save. Then again, it is possible that some consumers simply haven't learned their lessons. After all, it has happened before.

"After the last recession in 2001, they didn't [save more]. They didn't become more frugal. Just the opposite; they became more profligate," says Paul Edelstein, director of financial economics at IHS Global Insight. "So I guess the issue is, was this downturn severe enough to change attitudes for a generation or more?"

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In fact, Edelstein believes that it likely was a game-changing recession, making consumers more hesitant to spend. But until Americans have bigger paychecks in hand, it'll be impossible to know for sure how their decisions on where to put that money have changed.