According to the consumer credit report for the month of December, released by the Federal Reserve yesterday, household borrowing (excluding mortgages), rose at 9.3% annual rate in December, following a 9.9% increase in November. That was the biggest two-month rise since 2001.
The increase mostly came from student loans, followed by auto loans and credit card loans.
The data suggests an improvement in consumer confidence as the economy is on the mend and consumers are much more willing to borrow now; and at the same time, the banks are also slowly easing their credit standards.
Looking at the long-term picture: according to a McKinsey Global Institute research report, US household debt has fallen by $584 billion since the end of 2008, but defaults accounted for most of the reduction. Household debt to gross disposable income grew steadily over the last sixty years, but soared after 2000, exceeding the trend line by about 30% at its peak. The ratio has since fallen by 11% from the peak.
Total consumer borrowing now stands at $2.5 trillion, almost same level as before recession and up 4.4% from the September 2010 post-recession low.
The increase in borrowing could be a sign that the Americans were feeling more confident about the economy, employment and their personal income situations. Consumer spending accounts for about 70% of the GDP and an increase in spending would help the economic recovery gain some traction.
Or, more debt taken by the individuals, when the economic recovery is still shaky and unemployment still very high, could ultimately lead to more personal bankruptcies? And do we really want debt-driven consumption to aid economic recovery, as the incomes currently are growing more slowly than spending.
Join the debate!
