As Consumer Borrowing Rises, Are Americans Adding Debt Too Quickly?

The Federal Reserve released its “Consumer Credit Report” for November. The sum borrowed by Americans rose $20.7 billion to $2.477 trillion. The renewal of a rapid increase in credit debt may not be as good for the economy as it seems at first.

The Fed reported that:

Consumer credit increased at an annual rate of 10 percent in November. Revolving credit increased at an annual rate of 8-1/2 percent, and nonrevolving credit increased at an annual rate of 10-3/4 percent.

Those figures are high when set against increases in household income, which have been close to zero for several years when measured in real dollars. And unemployment remains at painful levels. It is also worth remembering that the ability of Americans to use home equity to secure personal debt is almost gone. Debt accumulation by individuals is risky under all of those circumstance.

One belief about the increase is that it has supported, and may continue to support, consumer spending, which triggers improvements in GDP growth. That is true, unless the same borrowers find themselves overextended as 2012 begins. Consumers suddenly may have to cut their borrowing. Such a deceleration may not cause a recession, but it can be added to the factors that undermine the economy, particularly low home prices and the fact that 16 million Americans remain out of work

Economists might rather see a slower and more steady increase in borrowing. A slower rate probably could be sustained. A sustained rate would mean GDP might not grow as fast as American businesses would like. But the odds of a sharp pullback would be less of a concern.

Douglas A. McIntyre