The Economy

Consumer Credit on the Rise

May 9, 2012

March saw consumers add $21.4 billion to the liability side of personal balance sheets. The amount of the increase is large; in fact, it is the largest jump in a decade. The total owed through March stands at $2.54 trillion. That is a lot of money any way you look at it. However, is the increase a bad sign?

The answer is no, it is not necessarily a bad sign. Fed statistics show that only $5.2 billion of the $21.4 was revolving debt, which includes credit cards. This is the first gain in revolving debt in three months. The balance of the increase in consumer debt, $16.2 billion, was for auto loans and student loans. Let us consider them separately.

Purchasing an auto at today's very low rates is a good idea. Low incentive financing compares very well with the consumer price index, which means consumers are smart to lock in the debt and pay it back with cheaper, inflated dollars. Add to this the expectation of higher rates in the future, and the argument for buying now is increased. Indeed this is very similar to the advice we are giving our clients and during our presentations. Now is the time to take advantage of very low rates and invest the money in your business. The cost of the investment is lower now at pre-inflation rates, and the interest rate is also very favorable. Factor in the repayment with inflated dollars, and you have a great plan for building wealth in the future.

I suppose all of us would like to live in a world where student loans are not needed, but for now we will deal with reality. A higher education is expensive, and many people find it necessary to finance that education. A surge in student loans is good on two fronts. One is the reason discussed in the paragraph above. Interest rates on student loans are set to double on July 1 if Congress does not act. Students are prudent to lock in the lower rate now. The second reason is that a better-educated workforce is generally a good thing for society and our global competitiveness.

On a final note, consider that a doubling of the student loan rate would increase the annual payment on 7.4 million students by $1,000 a year. The termination of the current payroll tax cuts will also cost most wage earners about $1,000 ($50,000 income with a two percent increase in the payroll tax). The latter reduces disposable personal income by $1,000 on millions of people, and the former reduces discretionary spending by $1,000 on 7.4 million people. Consumer spending will be negatively impacted by these events, and this is wholly compatible with our projection of a slowdown in the US economy in the latter half of 2013.

(news source: Bloomberg)

About the Author

Alan Beaulieu Blog | President

One of the country’s most informed economists, Alan Beaulieu is a principal of the ITR Economics where he serves as President. ITR predicts future economic trends with 94.7% accuracy rate and 60 years of correct calls. In his keynotes, Alan delivers clear, comprehensive action plans and tools for capitalizing on business cycle fluctuations and outperforming your competition--whether the economy is moving up, down, or in a recession.

Since 1990, he has been consulting with companies throughout the US, Europe, and Asia on how to forecast, plan, and increase their profits based on business cycle trend analysis. Alan is also the Senior Economic Advisor to NAW, Contributing Editor for INDUSTRYWEEK, and the Chief Economist for HARDI.

Alan is co-author, along with his brother Brian, of the book MAKE YOUR MOVE, and has written numerous articles on economic analysis. He makes up to 150 appearances each year, and his keynotes and seminars have helped thousands of business owners and executives capitalize on emerging trends.

Prior to joining ITR Economics, Alan was a principal in a steel fabrication company and also in a software development company.