Consumer Debts Are Up – Not Necessarily a Bad Thing

Yesterday the Federal Reserve released its January data about consumer debt levels.  Growth of 2.5% was logged which puts total consumer debt on pace to hit $2.4 trillion by the end of the year.  The breakout for the increased debt levels was interesting to say the least.  Non-revolving credit (e.g. loans for autos, boats and education) was up a massive 7.0%.  By contrast credit card debt hit a six-year low.

Analysis: I have long decried the level of consumer debt in the United States.  However, my focus has always been on unnecessary use of debt on the part of consumers.  That is, debt used to purchase a flat panel TV, or an iPhone, or an iPad, or non-essential clothes, or a cappuccino machine, or whatever doesn’t actually allow one to live within one’s means.

The type of debt that drives me crazy is credit card debt.  With interest rates usually around 18%, credit card debt is the gift that keeps on taking.  Ugh!  So what debts are legit?  It makes sense to take on debt to buy something today that is essential to your ability to earn money.  So a house makes sense.  Do you really want to save money for 30 years before you are able to buy a house with all of its attendant investment benefits?  No.  So an education certainly makes sense.  Does a car make sense?  Yes, to the degree that the car allows you to expand the range of possible jobs available to you.  But a car that is simply, purely about luxurious excess, excess that you cannot afford, is a waste of debt.  What about a boat?  Please.

So with that above list you probably can identify where I stand on the fact that consumer debt levels are up 7%.  The list of things that people are spending money on makes sense to me – excepting the boats.  During the Great Recession people forestalled purchases of automobiles – now with interest rates very, very low it makes sense to take on a car payment.  Education loans almost always make sense as long as the income you earn from that education exceeds the costs of the debt used to purchase that education.

In short, I am saying that it seems as if consumers are continuing to make wise spending decisions as we exit the Great Recession.  Credit card debt is down.  Retail sales are mostly in line with income growth – meaning that people are only spending money they earn and not borrowing via a credit card to make a purchase.  I have been monitoring consumer behavior to see if real lessons were learned.  The lessons of debt excess taught by the Great Recession seem to have stuck in the consumer consciousness.

Importance grade: 7; more data are needed to really, truly know if consumer behavior has changed.  What I am waiting for is when the unemployment rate is around 7% and GDP growth is around 4-5%.  In the meantime, my intuitive sense tells me that many consumers and their behavior is being driven by anxiousness.  But the underlying attitude is: “when will this end?”  In other words, there seems to me to be a palpable sense of “when things get better I can go back to the old ways.”

Jason