Rise in Household Debt Might Be Sign of a Strengthening Recovery

The following is an excerpt from an article in:


The New York Times
Saturday, October 27, 2012

Rise in Household Debt Might Be Sign of a Strengthening Recovery

By ANNIE LOWREY

WASHINGTON — For the first time since the Great Recession hit, American households are taking on more debt than they are shedding, an epochal shift that might augur a more resilient recovery.

For two of the last three quarters, American households’ total outstanding borrowing on things like credit cards, mortgages and auto loans has increased after falling for 14 consecutive quarters before then. Some economists even see an end to the long, hard process of deleveraging — as they refer to the cutting of debt relative to income or the nation’s economic output. That process, they say, has been a central reason for the extraordinary sluggishness of the recovery.

“We’re at an inflection point,” said Kevin Logan, the chief United States economist for HSBC. “Debt is less of a burden” for households, he said.

Closely watched economic figures released Friday underscore households’ nascent sense of strength. Despite tepid growth and still-high unemployment, consumer confidence has soared to a five-year high, according to a survey by Thomson Reuters and the University of Michigan. And economic growth numbers for the third quarter showed household spending picking up pace as well.

The drop in overall debt is in no small part because of foreclosures, delinquencies and write-offs by lenders which are slowing but not stopping. But the struggle to pay down old debts might not prove such a drag on economic growth in the future.

“We’re not getting a tail wind. We’re losing a head wind,” said Mark Zandi, chief economist at Moody’s Analytics, who said of the deleveraging process for households and businesses, “It’s basically over.”

Experts estimated that the overall level of debt, compared with income or economic output, would continue to fall for the next one to three years — with the earliest prediction for the end of deleveraging coming in mid-2013 and the latest at the end of 2015.

“By just about any metric, we’ve made a huge dent in a significant problem, but I don’t think we’re finished yet,” said Liz Ann Sonders, the chief investment strategist for Charles Schwab & Company. “The distinction is that deleveraging will no longer be a big drag on the economy, like in the first couple years after the crisis.”

For more, visit www.nytimes.com.