The US consumer has tossed in the towel on spending as borrowing falls for the first time since January 1998.

Consumer borrowing fell in August for the first time in more than a decade as U.S. households, battered by rising job layoffs and the decaying economy, cut back sharply on their use of credit.

The Federal Reserve said Tuesday that consumer borrowing fell at an annual rate of 3.7 percent in August, before the financial crisis became acute in September, forcing the government to approve a $700 billion rescue of the financial industry.

August’s decline in consumer credit marked the first time that total borrowing had fallen since a 4.3 percent rate of decline in January 1998.

The weakness reflected a big decline of 5.4 percent at an annual rate in the category that includes auto loans and a 0.8 percent rate of decline in the category that includes credit cards.

Economists are worried that consumer spending, which accounts for two-thirds of total economic activity, will decline in the July-September quarter. That has not happened since 1991 and could set the stage for the economy to slip into a recession.

Worrying about this economy slipping into recession is like worrying that your pet goldfish is going to die when it is floating dead on top of the tank.

Economists should to be thankful that consumer spending is dropping. Unemployment is soaring, people have been living beyond their means, and if consumers keep spending recklessly, eventual defaults and bankruptcies will be that much higher.

From the point of view of retailers, this Christmas season may well be one of the worst for decades. From the point of view of an economic recovery, reduced spending is actually a good thing, not a bad one. It’s long overdue for the “gotta have it now” generation to show a little fiscal restraint given the pool of savings sorely needs to be replenished.

The US needs to become a nation of savers once again, and that is just what is going to happen, whether Bernanke or anyone else likes it or not.

Mike “Mish” Shedlock
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