More Borrowing, But Less Consumer Debt

There’s good news and bad news on the consumer credit front. On the positive side, consumer lending is on the rise and will likely climb by at least 3% this year. And make no mistake, in a sluggish economy, with export growth decelerating, state and local governments cutting back and federal stimulus funds dried up, more borrowing -- and more spending -- by consumers is good news, at least in the short term.

Despite real disposable incomes that will increase by little or nothing in 2012 and actually declined last year, aggregate consumer spending will rise a bit faster than it did last year: 2.3% compared with 2.2%. That’s not the juggernaut one hopes for in a robust economy, but it beats a poke in the eye. Consumers are spending more and are once again a net positive for economic growth.

One reason for the increased borrowing: rising consumer confidence in the economy. It shot up in the second half of 2011 and is likely to trend higher this year, notwithstanding a slight dip in January’s levels. Another: Banks are finally loosening standards on car loans, credit cards and the like, though not home equity loans and cash-out refinancing of mortgages. The resulting upward bump in borrowing this year, combined with an increase last year, will be enough to offset the decline in lending in 2009 and 2010. At $2.5 trillion, overall borrowing in 2012 is expected to be on par with 2007 levels, when consumer spending was driving robust economic growth.

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There’s good news for long-term economic health as well. Despite the uptick in borrowing this year, aggregate consumer debt is being pared. Consumers’ debt payments fell from a peak of 14% of disposable income in 2007 to just over 11% last year -- a level not seen since the early 1990s. And less money going to service debt means more money available for consumers to spend on a new set of wheels for Mom, toys and new outfits for the kids, or the latest electronic gizmo for Dad. Not to mention summer vacations for the family.

But there is a Mr. Hyde side to the picture: Americans are only about half-done ridding themselves of unsustainable debt. Since 2008, aggregate consumer debt has fallen by 4%, to $584 billion. But it’s likely to take at least another year or two before overall consumer debt returns to the expected long-term growth trend.

And three-quarters of the decline in consumer debt has come not from paying it off, but from lenders writing it off. While the deleveraging is a critical step in getting the economy back on solid ground, the billions in bad debts that are written off in foreclosures and short sales of homes leave consumers with lousy credit records and lenders with painful losses. Neither is conducive to the kind of strong economic growth desired.