WASHINGTON -- U.S. consumers reduced their borrowing for the seventh straight month in August, as households worked to pay off debt and banks reduced credit card limits.

Americans are saving more and borrowing less as widespread job losses, stagnant wages and dwindling home values have spurred a move to greater frugality. While that's a positive trend in the long run, economists say, it can weaken the fledgling recovery as consumer spending powers about 70 percent of the economy.

The Federal Reserve said Wednesday that total consumer debt outstanding fell in August by $12 billion, a 5.8 percent annual rate. Wall Street economists expected a $10 billion decline.

That follows a downwardly revised drop of $19 billion, or 9.1 percent, in July, the largest decline in dollar terms on records dating from 1943. July's decrease was the steepest percentage drop since a 16.3 percent decline in June 1975.

"Consumers are clearly becoming much more conservative about their spending habits (and) paying down debts," said Zach Pandl, an economist at Nomura Securities. "This is likely to continue."

The declines reflect both a drop in demand for credit by consumers, as well as tighter standards among banks and other lenders.

Total consumer credit outstanding is now $2.46 trillion, down about 4.6 percent from its peak in July. The Fed's report covers credit cards, store cards, auto and other personal loans. It doesn't include mortgages or other real-estate related debt.

The retrenchment in August occurred even as consumer spending increased 1.3 percent, according to a report last week from the Commerce Department. That suggests consumers are increasingly buying with cash rather than credit, Pandl said.

The Cash for Clunkers auto rebate program helped boost personal spending in August. Economists noted that auto loans and other non-revolving debt dropped only 1.6 percent that month, according to the Fed, compared with a 12.6 percent fall in July.

Credit card debt, meanwhile, fell 13.1 percent, its steepest drop since February.

That may also reflect cuts in card limits. A report earlier this year by FICO, which produces the most widely known credit scores, found that companies slashed limits for an estimated 58 million card holders in the 12 months ended in April.

Consumers also are likely to restrain spending as long as jobs remain scarce. The Labor Department reported last week that the unemployment rate rose to 9.8 percent in September, the highest in 26 years. Many economists believe the rate will peak above 10 percent sometime next year.

Retailers already are bracing for another meager holiday season. The National Retail Federation said Tuesday that it expects sales during November and December to fall 1 percent from last year. While that's not as steep a drop as in 2008, last year's holiday sales saw the worst annual drop on records dating to 1967.

The NRF also expects retail sales for all of 2009 to fall 3 percent.