To Borrow or Not to Borrow?

U.S. consumer credit is falling, and -- believe it or not -- that could lead to an economic slowdown

Are you sufficiently worried that Americans aren't saving enough? Good. Now never mind about it. Based on the latest numbers, economists are telling us to worry that Americans aren't borrowing enough.

The amount of consumer borrowing usually increases every month. But on Jan. 9, the Federal Reserve announced that total consumer credit fell by a record $8.4 billion in October. And rather than rebounding in November, it dropped a bit more -- $600 million.

Why is that worrisome? If consumers aren't borrowing more, they won't be able to spend more. The economy could slow, and people could lose jobs.

SAVINGS AND LOANS. Of course, we've been hearing more lately about the opposite problem, which is that Americans are spending too much and saving too little. According to this logic, by borrowing too much, the U.S. as a whole is piling up a huge debt to the rest of the world that will be onerous to pay back.

Both arguments can be true. In the long run, it's important for the U.S. to increase national savings. But if consumers go on an abrupt spending strike, the economy could stall, like a car that gets thrown into a high gear too quickly.

The Fed's numbers cover credit cards, auto loans, and so on, but not mortgage debt. In recent years, people have been using cheap home-equity loans to pay off costly credit-card debt. That could account for some of the drop-off, even though adjustable mortgage rates aren't quite the bargain they used to be.

BORROW NOW, SAVE LATER. Economic analysis firm Action Economics says that while the numbers fluctuate, "it is clear that we have seen a sharp slowdown in credit growth over the last two months." It says consumers may be feeling uncertain because of high energy prices. That's possible, although gasoline prices, which are the biggest share of consumer energy costs, are down a lot from their post-Katrina peak.

You might think that consumers would borrow more when their incomes fall. In fact, they borrow more when their incomes are growing, because they feel more confident in their ability to repay. So the best stimulus to consumer borrowing would be a healthy job market. Unfortunately, the Labor Dept. announced on Jan. 6 that nonfarm payrolls grew just 108,000 in December, about half of what forecasters had projected.

Let's review. In the long term, Americans need to borrow less. In the short term, they need to borrow more. Got that? Good. Because in February, there will undoubtedly be a whole new theory knocking around.

READER COMMENTS

Coy is Economics editor for BusinessWeek in New York

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