For years, many people got away with being irresponsible with their finances, as a soaring housing market and low interest rates bailed them out time after time. Now that easy credit has come to an end, however, it appears that spendthrift borrowers have finally learned their lesson.
Digging out of debt
The Federal Reserve announced Wednesday that the total amount of consumer credit outstanding fell at an annualized rate of 5.8% in August, continuing a streak of lower monthly figures that began in February. Over that span, consumer credit has dropped by more than 4%.
More importantly for household budgets, it appears that consumers are focusing on shedding the most damaging types of debt. Revolving credit, which primarily includes credit cards, fell at more than a 13% annualized pace in August, and has fallen nearly 6.7% over the past seven months.
Clearly, from the perspective of your own personal finances, getting your debt under control is the best move you can make. When tough times put your finances in jeopardy and uncertainty threatens your ability to keep your job, the last thing you can afford is to pay outrageous finance charges. Conversely, being smart with your debt not only gives you some peace of mind -- it also frees up much-needed cash that can be used for such things as creating a savings fund for emergencies.
An investing scorecard for lower debt
Many worry, however, that although the long-term impact of lower debt on the overall economy may well be positive, the reduced spending that it implies could have a negative effect in the near term. With that in mind, let's look at who stands to win or lose from consumers doing the right thing with their debt.
Card issuers
For companies that issue credit cards, like Bank of America
Car companies
Automakers like Ford
Retailers
Similarly, among retailers, the mood is restrained. In its annual forecast for the holiday season, the National Retail Federation said it expects sales to drop about 1%, bringing the overall decline for all of 2009 to about 3%. Yet while that's bad news for everyone, falling credit card use among the financially strapped hits lower-end retailers like Wal-Mart Stores
What to do now
As an investor, you need to be aware of which stocks stand to get hurt from increased consumer responsibility. If people truly do rein in their spending on a sustained basis, then you'll want to identify companies that sell products that consumers simply can't live without. They're likely to thrive no matter what happens to consumer spending overall -- and their stocks should deliver nice returns to their shareholders. Those that depend on selling things people don't absolutely need, however, could see their problems continue for some time.
Think the tough times are just getting started for consumers? Read Ilan Moscovitz's list of stocks you should avoid in a recession.