Consumer credit, debt reports show improvement

A report showing a decrease in housing-related debt and an increase in credit card and other forms of consumer debt is good news for the economy according to Jeff Collins and Tim Yeager.

The Federal Reserve Bank of New York’s latest Quarterly Report on Household Debt and Credit showed that aggregate consumer debt fell $126 billion to $11.53 trillion. The fourth quarter 2011 report also showed that mortgage and home equity lines of credit (HELOC) balances fell a combined $146 billion, “a sign that consumers continue to reduce housing related debt,” the Fed report noted.

"While we continue to see improvements in the delinquent balances and delinquency transition rates this quarter, there has been a noticeable decrease in the rate of improvement compared to 2009-2010," Andrew Haughwout, vice president and economist at the New York Fed, said in a statement. "Overall it appears that delinquency rates are stabilizing at levels that remain significantly higher than pre-crisis levels."

Other highlights of the report include:
• $1.12 trillion of consumer debt (or 9.8% of outstanding debt) is delinquent, with $824 billion seriously delinquent (at least 90 days late);
• About 2.2% of mortgage balances transitioned into delinquency during the fourth quarter, resuming the recent trend of reductions in this measure. However, delinquency rates remain elevated compared to historical figures;
• Mortgage and HELOC balances on consumer credit reports fell $134 billion (1.6%) and $12 billion (1.9 percent) respectively;
• Non-real estate indebtedness rose $20 billion (0.8%) during the quarter, resuming a trend of increases;
• Aggregate credit card limits rose by $98 billion (3.6%), resuming the trend of increases observed in the first half of the year;
• Credit account inquiries within six months, an indicator of consumer credit demand, increased (2.7%) for the third quarter in a row; and,
• Student loan indebtedness increased slightly, to $867 billion.

Collins, an economist with StreetSmart and the economist for The Compass Report, said the report is a good sign because it shows that more “households are successfully de-leveraging” from debt.

“People aren’t willing to open up their wallets or checkbooks until they have their debt situation in hand,” Collins explained.

Tim Yeager, Arkansas State Bankers Chair at the University of Arkansas, also said the reduction of debt by consumers and uptick in spending are signs of an improving economy.

“Both of these actions are good for the recovering economy, both locally and nationally. Low, low interest rates on personal savings accounts really aren’t much of an incentive for consumers to sock away extra money at this time,” Yeager said.
 
Other economists say financial security among consumers at large remains negative. And while it’s not crucial in the short term, personal saving is good for the long term health of the country.

Thirty-eight percent of Americans are less comfortable with their savings now compared with one year ago; only 14% are more comfortable, according to Bankrate.com.

"Emergency savings remains a problem area for many Americans, which leaves them only one unplanned expense away from having high-cost debt," said Greg McBride, senior financial analyst with Bankrate.com. "Long-term unemployment, stagnant wage growth and rising household expenses are all contributing to this trend. As difficult as it may be to boost savings, having an adequate emergency savings cushion is critical to maintaining financial stability, and Americans need to find ways to sock away more cash for a rainy day."

Collins also said he disagrees with the notion that Americans will not return to the level of personal spending seen prior to the recession.

“This long painful recession has changed what they can afford, …  but it hasn’t changed their desire. It will take time, but once people achieve a level of comfort, they will return to those lifestyles,” he predicted.