Are Americans getting too cozy with debt again?

Some call it consumer optimism, but many analysts are warning of dangers ahead


They were supposed to be wary of debt, but data show borrowing among U.S. consumers is growing again. A number of analysts and media outlets are hailing this as a sign of newfound “consumer optimism,” but a closer look at the numbers leaves little reason to cheer.

Though credit card debt has been decreasing, the latest data from the Federal Reserve, which exclude mortgages and home equity loans, borrowing for cars and student loans has soared. Overall, consumer borrowing outside real estate increased by US$8.7 billion in February of this year—topping a six-month upward trend that saw a staggering increase of US$18.6 billion in January.

The Associated Press notes that “consumers are taking on more debt at a time when their wages have not kept pace with inflation. And they are paying more for gasoline.”

Not that Canadians have anything to teach Americans here, but it’s still legitimate to ask: What does this mean for the U.S. recovery? It depends on who you talk to.

Some experts are celebrating the borrowing spree as a sign that consumers are “growing more optimistic,” as the New York Times’ Floyd Norris put itHe seems to belong to the camp that believes consumers will ultimately drive the recovery with their wallets. This group is even lamenting the fact that people aren’t using their credit cards enough.

Others, though, are taking the borrowing revival as bad news. Wasn’t too much household debt one of the main reasons for the Great Recession and the lacklustre recovery that followed? Analysts in this camp see lower credit card spending as a positive, but worry that savings still aren’t where they should be. As a recent report by CIBC noted:

“While the fog of [economic] uncertainty suggests that more money should be channeled towards savings, this has not been the case recently. Note that the decline in the savings rate during 2011 occurred against a backdrop of further decline in US home prices, increased volatility in the stock market and a slump in consumer confidence—all of which should have pushed the savings rate up, not down.”  

The authors point to a possible explanation: “With labour income on the rise and interest rates still extremely low, consumers are not feeling quite the pinch of financial obligations.” McKinsey Global Institute has also pointed to consumers not “feeling the pinch.” They reckon about two-thirds of the debt reduction in American households has come from debt pardon in the form of write-offs and foreclosures. In other words, many Americans didn’t really have to save up and pay their way out of debt—which might explain why dipping into the red again might not seem as spooky as it should for many people.

But the main reason to be skeptical of the “consumer optimism” view is that the borrowing spree has been driven by student loans, which, if anything, are depressing private spending. Ballooning student debt is the sign of a disappointing bet many Americans placed on higher education in hopes it would improve their chances in the toughest labour market the U.S. has seen since the 1930s. That’s why, when the crisis hit in 2008, colleges and universities across the country saw enrollment levels soar. But here we are in 2012 and half of those recent graduates are waiting tables at best. No wonder student loans have now become the latest focus of election-year squabbling between Republicans and Democrats.

Maybe this time America will have to find a way out that doesn’t go through people’s wallets.

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