Consumer borrowing dropped in February by 5.6% to an annual rate of $2.45 trillion, according to the Federal Reserve. Revolving credit, a good proxy for credit card debt, dropped by 13.1%. Nearly everyone who looked at the data came to the same conclusion. Americans are buying less because they kept their Visa and MasterCard  in their wallets. As a byproduct, they carry less leverage, which would seem to be a good thing.

But, on the scales the potential drop in consumer spending outweighs the “deleveraging” of the American consumer. He was overextended and more likely to default on his card obligations as more people lost jobs and found that their credit balances were higher than the value of their homes.

GDP, already tepid in the first quarter according to most economists, obviously cannot rebound without a robust consumer. He is still the engine of over 60% of American economic growth. The Administration would like to replace part of the consumer’s activity with exports, but that has been only moderately successful. Until the yuan is revalued and global economic activity in Europe improves, the export business will remains a tough one.

The critical difference between the Chinese and US stimulus packages which began last year is that the People’s Republic appears to have encouraged consumer spending. There is evidence of this in Chinese inflation and import numbers. The US package went toward creating jobs indirectly through a series of infrastructure improvement programs. That plan barely worked. There is a good argument to be made that the US would have made a mistake to give more money to the already debt-happy American consumer, but the result of that decision is a dearth of spending for goods, cars, and even homes.

The federal government may say that it did not have a way to push the consumer back into the market place. That is almost certainly true. The falling value of housing nearly destroyed consumer confidence and Washington could not have afforded to revalue every mortgage in America in favor of the home buyer even if had wanted to. The confusion in the home lending business  would have been catastrophic.

Washington got its lower risk, but forgot to remember to that it is important to be careful what you wish for. The American consumer is becoming less and less likely to default on his financial obligations and more and more likely to stay home and watch TV rather than going to the mall.

Douglas A. McIntyre

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.