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Power to the Borrower!

March 15, 2012 3 minute Read by John Prestbo

Good news from the Federal Reserve last week: Americans are borrowing more. Wait. Isn’t that bad news? Aren’t debt-happy consumers an ingredient of a recipe for financial disaster, a la 2007-2009? Haven’t we been harping for years that everybody should save more and spend less? It’s true that unsustainable consumer debt was part of the problem leading to not only the recent Great Recession, but also to the Great Depression of the 1930s. When the good times roll, as they did in the years prior to both of those economic downturns, profligacy proliferates. But is also true that renewed consumer spending is part of the solution to invigorating the economic recovery. About 70% of the U.S. economy is based on people buying stuff, everything from weekly groceries and a morning Starbucks latté to vacations, cars, and houses. For good reasons — high unemployment, still-sinking housing prices — consumers have opened their purses less often, and dug less deeply, over the past few years. That’s why it is good news that the Fed reported a slight (0.25% annual rate) increase in household debt in the final quarter of 2011. It was the first increase since mid-2008, and it indicated consumers had regained enough confidence in future improvements to borrow a little bit more. Yesterday’s report of a 1.1% increase in retail sales during February reinforced this interpretation. The really good news is that added debt did not push consumers further underwater. For one thing, household income also improved, as more people were hired and the stock market rose. For another, some of the debt increase was in student loans — an investment in the future — though auto loans and credit cards also ticked higher. But people continued to reduce mortgage debt. As a result, we hope to see continued improvement in the ratio of debt to disposable income when that report is released. At the end of the third quarter it stood at 11.09%, the 11th quarterly decline. It had been as high as 13.96% in the third quarter of 2007. So far, consumers seem to be acting judiciously. More power to them.


Author

John Prestbo
John Prestbo

2012 Economic Growth Fellow

John Prestbo is retired as editor and executive director of Dow Jones Indexes. Previously he was markets editor at The Wall Street Journal. He has co-authored or edited several books over the past 30 years. The most recent is “The Market’s Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average,” published in 1999 by Dow Jones Indexes. His column, Indexed Investor, appears on the highly regarded “MarketWatch” business and finance website. He received his bachelor's and master's degrees from Northwestern University.

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