According to a recent report issued by the Federal Reserve, Americans are stepping up their borrowing. The report indicated that consumer borrowing on car loans, credit cards, student loans and other types of installment debt grew at a seasonally adjusted annual rate of 10.2% to $2.54 trillion in March from February, a figure that does not include mortgages. March’s increase in borrowing was the biggest monthly elevation since November 2001, when zero-percent financing on car loans launched a surge in borrowing after the September 11 terrorist attacks. The move from household debt reduction to increased borrowing outside of mortgages began in the fall of 2010, but accelerated late last year. The question is, is this a sign of a recovering economy or the result of struggling consumers feeling the need to borrow?
Increased Borrowing Could Lead to More Debt
Some economists say the see the shift in borrowing as a positive, taking into consideration other encouraging signs of an improving economy, including surveys showing rising consumer optimism. Banks also appear to have loosened lending standards a bit and may be giving consumers easier access to credit. Unfortunately, consumers are still in a tough position, as income growth has been slow and unemployment remains high at 8.1%. For these reasons, the increase in borrowing could result in added debt, which could hurt both consumers and the economy over time if incomes don’t rise more quickly.
Credit Card Use on the Rise
This new borrowing largely reflects Americans finally buying cars after putting off such purchases for years, and an increase in college enrollment due to the weak job market. Data also showed however, a spike in credit-card use, which economists say could signal a broader, underlying shift in consumer behavior. Debt on revolving credit (mainly credit cards) increased at a 7.8% annual rate, according to the Federal Reserve report, which represents the second-largest increase since February 2008. Renewed credit-card use, while signaling a financial strain in some households, could also represent the increased confidence Americans have in the economy and their financial standing, said Karen Dynan, co-director of the economic studies program at the Brookings Institute, a Washington think tank.
“It’s good for the economy in the short run,” said Dynan of the increased borrowing, while noting that it also presents risks. “Some people are borrowing ahead of expected future increases in income. If those increases in future income aren’t realized, than that could put some households in a bad position.” Economists say the increasing willingness to borrow could indicate that the long process of debt-reduction in households could be easing up as Americans cut some forms of debt and emerge through foreclosures with fewer financial obligations.