Debt Consolidation Slowing the Economic Recovery? |

There’s a reason why the economy’s recovery seems so sluggish: Consumers are taking steps to reduce their debt and curtail their spending, doing everything from signing up for debt consolidation services to working with credit counselors to change their negative spending habits. This may be good for consumers who are finally getting a handle on their debt after years of overspending. But it’s not good the economy’s recovery. The less money that consumers spend, the slower the economy grows. And until the economy begins to grow at a more significant pace, you can expect everything from housing prices to unemployment to remain at uncomfortable levels.

A Sluggish Recovery

The Wall Street Journal recently examined this trend. The paper wrote that even with a big bounce in corporate earnings and a boom in factory jobs, the economy isn’t growing jobs at anything but a frustratingly sluggish pace. At the same time, the paper reported, gross domestic product grew at only half of the 7 to 8 percent pace that usually occurs following major recessions. The paper points to a big reason: Consumers are relying on debt consolidations, credit counseling services and debt settlement companies to reduce their debt. And once they do this, they’re not spending nearly as much as they did during the national economy’s boom years. This is practically a scientific formula for a slow recovery.

Households Cutting Back

According to the Wall Street Journal, the U.S. Federal Reserve should soon announce that total consumer credit outstanding in April fell by $1 billion to $2.45 trillion. This is the 17th monthly decline in outstanding consumer credit in the last two years. This is historically significant. It has never before happened in the 67 years that the Federal Reserve has tracked this trend. It seems that after years of spending carelessly, U.S. consumers are turning to debt consolidation and credit management services to eliminate their debt and cut back on their monthly spending. Some, of course, are doing this out of necessity: They may lack the credit scores necessary to qualify for loans for big purchases. Others are doing it because they’ve either lost their jobs, fear that they’ll soon lose theirs or have watched unpaid days off eat into their annual salaries.

More Debt Consolidation In The Future?

How long will this trend continue? Will consumers continue to take debt consolidation steps? Will they work on improving their credit scores and slashing their revolving debt? The recent history of U.S. consumers would suggest that this new frugality is a temporary thing. But maybe this time is different. Maybe we’ve all been burned enough by the Great Recession to have permanently changed our ways