Thursday, March 10, 2016

Record Debt: Good or Bad?

Consumer debt is near record highs in the United States and setting new records in Canada, and no one is quite sure what it means. The increase in debt indicates that more people are working and therefore able to borrow, and that is a positive economic sign. The steep increase since last year, though, may indicate that people’s incomes are not keeping up with their expectations, and that could be an advance indication of reduced spending in the coming months. Consumer debt went up the most in Texas and Alberta, two areas involved in oil, so declining oil revenues may be part of the explanation. There isn’t enough data to say so with confidence.

While an increase in debt could be a sign of a confident consumer and a healthy economy, it is generally not a good thing for the consumers who fall into a cycle of debt, whether from overconfident shopping or unexpected decline in income. Other statistics suggest problems. Consumers are being tricked into borrowing for cars they can’t quite afford, while only a small fraction of households can boast that they have no net debt. An economy built on consumers’ misfortunes and bad decisions cannot be a healthy economy. Looking at the details, it’s easy to see that people are still recovering from the aftereffects of the economic malaise of a decade ago. “Back to normal” is the wrong idea when coming out a depression (even if called a recession), but for those who are waiting for the feeling of a normal economy, that may take a few more years. Obviously, when we arrive there, it won’t much resemble the last “normal” economy from circa 1997.