Suffering from a debt hangover for the past four years, Americans will resort to a time-honored cure -- hair of the dog that bit them. A pickup in borrowing will give the world’s biggest economy a much-needed boost next year as federal government austerity pinches growth.
Workers will be more willing to take out loans as the lowest unemployment rate in almost five years bolsters job security, while banks will be more likely to lend after cleaning up their own balance sheets. The resulting gains in personal spending will help counter the effects of federal-budget cuts that are weighing on the expansion, according to Ben Garber, an economist at Moody’s Capital Markets Research Inc. in New York.
“Consumers taking on more debt at a time when the deficit is shrinking would be a strong positive for the economy,” Garber said. “This will help offset some of the fiscal austerity that we’re experiencing.”
Federal outlays relative to the size of the economy declined to 22 percent in 2012, the smallest since 2008, according to figures from the Congressional Budget Office. It projects the share will drop over the subsequent five fiscal years, reaching 20.6 percent in 2017.
While the government is just beginning to cut back, consumers are well on the road to recovery and will be in position to take up the slack, Garber said. Household debt as a share of income was 92.2 percent last quarter, a decade low and down from its peak of 114 percent in 2009.
The debt-service ratio, which measures how much income is devoted to paying off obligations, has also steadied after dropping last year to a record low.
That debt load probably won’t get much lighter as Americans have already come around to using credit to buy automobiles, homes and other big-ticket items, Garber said.
Thomas Nitzsche says that while he’s become more frugal, he’s beginning to feel more comfortable about borrowing and spending than in years past.
When he was let go from his job in a Western Union Financial Services Inc. call center in July 2008, Nitzsche had about $190,000 in combined mortgage, credit card, auto and student loan debt.
“It’s terrifying,” said Nitzsche, 34, who bought his home in St. Louis in 2007, the same year the U.S. entered a recession. “It was definitely scary, but I was pretty determined to do whatever I could do to not go down that path of bankruptcy.”
He found a lower-paying job at ClearPoint Credit Counseling Solutions -- and made ends meet through ways like subletting rooms in his home. Now earning as much as he was five years ago, Nitzsche has been able to cut his debt load by about 28 percent and is whittling down his home and student loans. He even took out a $5,000 loan to buy a used, 17-foot ski boat over the summer.
Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York, says it’s a positive step for the economy when consumers feel confident enough to borrow money.
“It’s all about a hand-off,” said Dutta. “We’re entering the next phase of the deleveraging process where the government de-levers and the private sector begins to re-lever.”
Domestic banks are making loans more readily available, easing lending policies to businesses as competition stiffens and relaxing standards on mortgages, according to results of a Federal Reserve survey issued today. For the first time in three years, as many banks loosened lending rules on credit cards as tightened them, the report also showed.
Forty-six percent of U.S. and Canadian bankers surveyed project new consumer credit requested will increase over the next six months, according to a report published Oct. 9 by credit-risk grader Fair Isaac Corp. (FICO:US), which produces the FICO score. Some 53 percent of lenders estimate credit-card balances will increase during the period.
The average FICO score of all closed home loans fell to 732 in September from 750 the year before, according to data from Ellie Mae Inc. (ELLI:US), the provider of software used by mortgage lenders to make home loans. Declines in the average score may mean credit is more accessible or it may indicate increased demand by mid-level borrowers.
Falling foreclosures, bankruptcies and defaults on consumer loans all point to improved balance sheets as the economy continues to expand.
Home-foreclosure filings fell to about 129,000 in August, down 65 percent from a peak of about 367,000 in March 2010, according to data from Realty Trac Inc.
The number of non-business bankruptcies in the 12 months ended September fell to 1.07 million from the 1.54 million reached during the same period in 2010, according to data from the U.S. Courts. The national composite consumer-credit default rate was 1.38 percent in September, compared with the 5.51 percent peak reached in May 2009, according to an S&P/Experian index.
“Banks are definitely more eager to lend than they have been in several years,” said Joe Carson, director of global economic research at AllianceBernstein LP/USA in New York. Households in the upper half of the income distribution are already taking advantage of lower interest rates, as better job security and bolstered stock portfolios make them feel more comfortable about borrowing, Carson said. Falling unemployment will pull in even more households, he said.
Cuttino Alexander is among Americans willing to borrow more after becoming a pastor in Mount Holly, North Carolina, following his graduation from the Lutheran School of Theology at Chicago in May.
He and his wife Jessica put 3.5 percent down on a $215,000 five-bedroom, two-story home built in 1909, obtaining a 4 percent loan backed by the Federal Housing Administration, a federal agency that helps first-time and lower-income homebuyers obtain mortgages.
“We don’t feel like we’re crushed right now with debt,” said Alexander, 29, even though he still has student loans to pay back. “From our perspective as first-time homebuyers, it’s not going to get any better in terms of home prices and interest rates.”
A greater willingness to borrow bodes well for the sales -- and stock prices -- of businesses ranging from automakers to travel and consumer-technology companies, said Walter Todd, chief investment officer at Greenwood Capital Associates LLC in Greenwood, South Carolina. By contrast, there will be some losers as government spending drops, including companies like Cisco Systems Inc. (CSCO:US) and Oracle Corp. (ORCL:US) that supply computers, software and networks to businesses and the public sector, said Todd, who helps manage $950 million.
The Standard & Poor’s 500 Index rose 0.4 percent to 1,767.93 at the close in New York. The yield on the 10-year U.S. Treasury note fell two basis points, or 0.02 percent, to 2.60 percent.
The brightening consumer outlook marks a shift as households had taken a back seat in propelling the economic expansion that began in June 2009. In the five years leading up to the recession, consumer expenditures increased an average 0.5 percent a month, according to Commerce Department data. Since the recovery began, the monthly gains in spending have averaged 0.3 percent.
Consumer spending rose last quarter at a 1.6 percent annualized rate, the weakest performance in two years, according to the median forecast of economists surveyed by Bloomberg ahead of Commerce Department figures due Nov. 7. The economy probably grew at a 2 percent pace, down from 2.5 percent in the second quarter, the survey showed.
Not all agree that Americans are in a position to borrow and spend more. While debt levels have come down, they remain historically high, said Alison Williams, a senior financial-industry analyst for Bloomberg Industries in Skillman, New Jersey. Household debt as a share of personal income remains 15 percentage points above its 40-year average of 77 percent.
“The consumer remains highly leveraged on a historic basis,” she said. “They don’t have the capacity, really, to increase leverage.”
One positive development will be that the pace of fiscal tightening will probably slow, making any contribution from households more meaningful, according to Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York. Declines in government spending will trim 0.5 percentage point from gross domestic product in 2014, down from 1.5 percentage points this year, O’Sullivan projects.
With some households more inclined to borrow, the combination will be a boon for economic growth, Moody’s Garber said. He predicts GDP will expand up to 3 percent next year.
“If you reduce the government cutback and then you add in strong rates of consumer borrowing, that’s something that could take us faster than the very sub-par growth that we’ve seen this year,” he said. “Most of the optimism has been shifted to next year’s outlook, and that’ll be on the backs of U.S. consumers.”
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