Consumer debt surge highest since 2001: Why some say it’s good; why some say it’s bad in the deck, please

Middletown Journal - May 15, 2012

Randy Tucker

Southwest Ohio residents continue to reach for their credit cards and sign off on auto loans at a brisk clip, boosting borrowing twice as fast as most economists had predicted.

Total U.S. consumer credit grew by $21.36 billion in March, according to the latest figures from the Federal Reserve. That was the biggest month-to-month jump since 2001 led by a surge in auto loans, personal loans and student loans, which combined for about $16 billion of the increase.

Credit card debt shot up, too, climbing by $5.1 billion after a $2.3 billion decline in February, according to the Fed.

As consumers increasingly leverage credit, local economists and financial experts continue to debate whether the turnaround from a lengthy period of austerity is good for the economy.

On one hand, a certain amount of consumer debt is necessary for a healthy economy since consumer spending accounts for about 70 percent of economic growth.

But overspending consumers strung out on easy credit were among those hit hardest by the financial collapse of 2008, and some experts fear consumers could be heading for the same financial cliff they fell off at the start of the recession.

“We don’t see it as much now as we did before the recession, but there are some individuals who are overextending themselves and doing just undisciplined kinds of things with credit,’’ said Melodee Shiels, director of Consumer Credit Counseling. “But the bulk of our clients are using credit just to get by and meet day-to-day expenses. Eventually, you reach your limit, and then you end up in a downward spiral because you can’t even make minimum payments.’’

In Ohio, the average credit card balance climbed to $3,648 in March, up more than $190 from year ago, according to the latest figures available from Experian, one of the three main credit bureaus.

James Brock, a Miami University economics professor, said the pick-up in consumer borrowing can be viewed one of two ways:

“Some people would argue that it’s an indication that things are not good because people have had to go deeper into debt to get by,” he said. “But the other side of the story is that maybe things are getting better and people may feel a little safer about spending more than they did before. It’s really a glass-half-empty or glass-half-full question.” Brock thinks the glass is half full. “The economy is getting better,” he said. “It’s getting better in fits and starts; sometimes it’s two steps forward and one step back. But if you look at most of the broad statistical gauges of the economy, they’re generally trending up.” Brock noted that retail sales, car sales, even home sales have all started to pick up in recent months. “I would look at (consumer credit) as another reinforcing measure of the recovery of the economy,’’ he said.

Brock is not alone. More consumers also seem to think the economic glass is half full rather than half empty.

U.S. consumer sentiment has risen to its highest level since January 2008, according to the Thomson Reuters/University of Michigan’s preliminary May reading on the overall index of consumer sentiment. The index rose to 77.8 earlier this month from 76.4 in April, beating forecasts for a small decline to 76.2.

The monthly survey found also 65 percent of consumers thought buying conditions were favorable, the highest level in more than a year.

While many households are feeling more upbeat about the economy, a significant number have simply been compelled to make purchases — regardless of their financial situation.

David Rothstein, a researcher at Policy Matters Ohio, a public policy think tank in Cleveland, said Queen is typical of people who have delayed spending on necessities.

“People have waited and waited to see if the economy would get better,’’ he said. “They’ve put off different purchases like moving or buying a car, but people can no longer wait to make those decisions.

“They don’t have the money anymore to pay up front, so they just have to borrow,’’ he said. “And we saw what that did during the mortgage crisis.’’

Ohioans are especially vulnerable to financial calamity as a result of overspending, according to the Corporation for Enterprise Development’s Assets and Opportunity scorecard.

Nearly a third of Ohio households are asset poor, or have little or no financial cushion to rely on in case of emergency. Ohio ranked 37th out of 50 states and the District of Columbia for the financial security of its residents.

Consumer debt surge highest since 2001

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