Consumer Debt: Nothing But Bad News for Americans and the Economy

Source: http://www.flickr.com/photos/92166610@N08/

Source: http://www.flickr.com/photos/92166610@N08/

Americans are in debt — a lot of debt, which is hardly surprising for a nation with such emphasis on consumerism, but highly problematic in terms of personal finance. Whether it’s credit card debt, leftover college debt, or other sources, most households in the U.S. are working with some sort of weight chained to their personal finances.

The Federal Reserve Bank of New York released data in February that showed American consumer debt has risen higher than it’s been since 2011, totaled at $11.52 trillion. This is up 2.1 percent form the third-quarter of 2013, the greatest increase seen since the third-quarter of 2007. While debt is still staying well below it’s highest point in 2008 at the time of the financial crisis — 9.1 percent below — personal debt is still concerning when you consider the stats. According to Business Insider, one in ten consumers had over ten credit cards in 2010, while the average individual had four, with each household dealing with an average of $6,500 worth of debt. Over 2 million households is dealing with over $20,000 worth of credit card debt.

Even more concerning is that 28 percent show credit card debt over that which they have held in their savings account, with only 51 percent having more in savings than they have in credit card debt. “This is not moving in the right direction,” Greg McBride, chief financial analyst at Bankrate.com — which provided the numbers — told Time. “American consumers are not showing improvement in these areas,” hes said.

Of course, consumer debt isn’t always a bad thing. In terms of economic indicators, willingness to go into debt can suggest consumer confidence and improved economic stability. But debt can also mean the exact reverse; those with heavy credit card or university deficits may be unwilling or incapable of investment in the housing market, buying a new car, and so on. Part of what determines this is economic health, because as usual, cause and effect is somewhat cyclical in economics. With a strong economy and healthy economic growth, getting out of debt is also easier, so going into debt has less negative effects on your ability to spend and invest in economy stimulating expenses. With a strong economy, job security is higher, home ownership is more likely to increase in value, paying off college educations becomes more doable with higher quality employment post-graudation, and so on.

Consumer debt can be looked at in terms of the debt service ratio (DSR), meaning total percent of income, or in terms the financial obligation ratio (FOR), which is separate looking at rental payments and mortgage, unincluded in the DSR. Recently at least, consumer debt heights seem to indicate more negatives than positives. This is especially clear when you consider the housing market hasn’t done terribly well in 2014 so far. In February, mortgage applications hit their worst level in two decades; for the week ended February 21, applications for home loans dropped 8.5 percent on a seasonally adjusted basis from the week before. On top of that, The Center for Responsible Lending reports that as of April 2014, one in seven Americans is being sought by debt collectors for amounts that average approximately $1,500.

debt

Looking at Calculated Risk Finance & Economics graph of the Federal Reserve System’s data release on DSR and FOR levels over the years, what we see is that mortgage debt has gone down considerably since the housing bubble burst and the Great Recession began in 2008. The DSR percentage has also gone down, partly explainable in that credit card standards changed and banks reduced consumer lending in response to the adverse changes.

Basically, the news is all bad. Americans are in debt beyond what many can personally handle financially when looked at person to person. Plus, economically we’re still suffering an inability to pay off debt as well as consumers could pre-recession times. At the same time, data is demonstrating American’s unwillingness to be the big consumers we have been in the past; credit inquires for auto loans, “an indicator of consumer credit demand,” remained flat compared to the previous quarter in the N.Y. Federal Reserves April report, showing no growth. Originations on housing debt, which show new mortgage balances for consumer credit, fell by $452 in the same report — though it’s notable that foreclosures and delinquency rates both showed decreases.

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