Debt report: Is growth of household borrowing a peril or promise?
Wednesday, January 31, 2018
Borrowing is booming. U.S. household debt rose again during the third quarter of 2017 — the 13th consecutive quarter of growth, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data in its Quarterly Report on Household Debt and Credit.
"Total household debt increased by $116 billion (0.9 percent) to $12.96 trillion in the third quarter of 2017," according to the report. "There were increases in mortgage, student, auto and credit card debt (increasing by 0.6 percent, 1.0 percent, 1.9 percent and 3.1 percent, respectively) and a modest decline in home equity lines of credit balances (decreasing by 0.9 percent)."
What does this rising household debt mean for businesses now and ahead?
"In general, rising consumer debt signals optimism about the economy and the prospect for economic growth, as households feel confident taking on loans for big-ticket purchases such as homes and autos," said Aparna Mathur, a resident scholar in economic policy studies at the American Enterprise Institute.
"This should be good news for businesses."
Employment is one metric in the household debt story. Consider the unemployment rate of 4.1 percent for the last three months of 2017. That rate compares favorably with a jobless rate of 10 percent in October 2009, four months after the end of the Great Recession, a period of two quarters in which gross domestic product (GDP) growth was negative.
Consumption also plays a central role in the U.S. economy, accounting for 70 percent of GDP. Accordingly, household income, or cash flow, is crucial to buying and borrowing power. However, the latter involves a degree of peril.
"We need to be careful that rising debt levels are accompanied by rising household incomes, so that individuals have the ability to repay their debts and debt levels don't lead to rising economic insecurity," Mathur said. "Since wage growth has still largely not taken off for the vast majority of Americans, increases in mortgage and student debt could in fact be a cause for concern."
Wage stagnation makes repaying household debts more difficult, all things equal.
"Real" average hourly earnings increased only 0.4 percent, seasonally adjusted, from December 2016 to December 2017, according to the Bureau of Labor Statistics. Real earnings are workers’ income available for buying after tax and other contributions and deductions, adjusted for inflation.
For the American workforce and the businesses they patronize, another key question arises with the Fed's new report on household debt. How shall we look at it versus indebtedness levels before the Great Recession? Are the numbers in the Fed report a cause for concern?
"Net worth for households and nonprofits now stands at 673 percent of disposable income, higher than even the peak seen before the financial crisis," said Ryan Bourne, R. Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute. “Meanwhile, household debt service payments at 10.3 percent of disposable income are much lower than the precrisis peak of 13.2 percent."
Thus, he urges a look at both sides of the household balance sheet — disposable income and debt service — for a clearer view of what is at stake in the American economy.
"There's no reason, per se, to think rising household debt levels then are what we should be worried about from an economic perspective," Bourne said. "The sustainability of asset values is a much more interesting topic."
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