WASHINGTON AND LOS ANGELES — The amount Americans owe on credit cards and other consumer loans plunged a record $21.6 billion in July, clouding prospects that the budding economic recovery would soon extend to Main Street.
The drop in consumer debt for the month was the largest since the Federal Reserve began tracking the data in 1943 and the sixth straight monthly decline in outstanding consumer debt, the longest streak since 1991.
The amount of the decrease -- five times what analysts had predicted -- along with continued job losses and an uncertain housing market show that consumers are still skittish about borrowing money for big-ticket purchases, even though economic data show that the deep recession may have technically ended.
Consumer spending accounts for roughly 70% of the nation's economic activity.
"People want to see where the economy is going before they commit to more debt. I wouldn't make a major purchase right now," said Norman Moore, a semi-retired computer consultant from North Hollywood, who has trimmed his debt and cut back spending.
Although paying down debt and getting finances in order is a good strategy for individual households, it doesn't bode well for a nascent recovery in a nation deeply dependent on consumer spending.
"The consumer credit data highlights one of the key reasons why the economic recovery will be a bit of a slog, at least through this time next year," said Mark Zandi, chief economist at Moody's Economy.com.
"The credit crunch has abated since the financial panic was at its worst earlier in the year, but credit is not flowing normally," he said. "Credit is the mother's milk of economic activity, and until it flows more freely, the economy will struggle."
Some economists cautioned observers not to read too much into July's steep decline in consumer debt, which doesn't include such long-term debt as mortgages.
Although the continued downward trend is a cause for concern, the economists said the big drop was affected partly by the government's "cash for clunkers" program, which led consumers to put off borrowing money to buy cars until late in the month, when the initiative kicked in.
The deepest decline in July's numbers was in the category dominated by auto loans, which fell by $15.4 billion. Nigel Gault, chief U.S. economist for IHS Global Insight, expects those nonrevolving loans to increase in August, when most of the $3 billion in clunkers deals were made, somewhat offsetting July's record drop.
