WSJournal. Freshly Flush, the Consumer Is Back.
American consumers' belt-tightening is finally coming to an end.
For the past four years, U.S. consumers have repaired their balance sheets from the damage of the housing crash and recession by paying down their debt or walking away from it—a process economists call "deleveraging." Now fresh data suggest a growing number of Americans are reversing course and becoming more comfortable borrowing—a development that could fuel more spending and give the sluggish recovery a lift.
U.S. households ramped up their borrowing at an annualized rate of 2.4% in the final three months of 2012, the biggest jump since the beginning of 2008, according to a Federal Reserve report released Thursday. Mortgage borrowings outstanding dropped only 0.8%—the lowest percentage drop since early 2009. Meantime, other kinds of consumer borrowing expanded at the fastest pace since the third quarter of 2007.
"The fourth quarter marks the end of household deleveraging in the U.S.," said Harm Bandholz, chief U.S. economist at UniCredit. "Mortgages will bottom out and start to increase. I've been on the cautious side, but 2013 is the first year I'm reasonably optimistic."
The report provides the latest sign Americans are repairing their balance sheets in the wake of the financial crisis.
The central bank's borrowing data Thursday are the latest sign that the mind-set of the American consumer appears to be shifting from earlier in the recovery, thanks partly to a rebound in the stock market and rising home prices that are making many households feel wealthier.
The net worth of U.S. households—the value of homes, stocks and other investments minus debts and other liabilities—rose 1.8% in the fourth quarter of 2012 to $66.07 trillion, the highest level since the final quarter of 2007, when the recession began, the Fed said. Americans continued to borrow in January, mostly for education and cars, another Fed report Thursday showed. And a separate report by the Federal Reserve Bank of New York last week showed Americans late last year took on more debt for the first time since the throes of the recession as households took out more mortgages and far fewer fell into foreclosure.
Granted, many Americans continue to struggle with debt, and unemployment remains high. Those without big stock portfolios may not find their finances are improving as much. And consumer spending, which drives the bulk of economic growth, isn't as robust as in past recoveries. A return to borrowing could also turn into a bad thing if households bite off more than they can chew.
Still, while the Fed's figures aren't adjusted for inflation, if Americans feel wealthier because stocks are going up and home prices are on the rise, they are likely to feel that their debt is less of a burden. They may also be more willing to borrow and spend, pumping up the economy.
The nascent recovery of the housing market is playing a key role in making Americans more confident about the economy by raising the value of their homes, often their most valuable asset. The value of real estate owned by households climbed nearly $450 billion in the fourth quarter of 2012, the Fed said. Americans also have much more equity in their homes: a measure of owners' equity as a percentage of household real estate hit 46.6%, the highest since the first quarter of 2008.
Meanwhile, the stock-market recovery is also making some Americans feel more flush. The value of stocks owned by households rose over $150 billion in the fourth quarter, even as the Dow Jones Industrial Average dropped 2.5% during the period—reflecting rising prices of foreign stocks and more investors moving into stocks in general after shying away. The stock market has seen substantial gains since then—the Dow is up over 9% this year, at a record high—suggesting household balance sheets have improved further.
One caveat: Americans who don't own stocks aren't seeing their balance sheets improve as much-and may not respond by borrowing and spending more. The net worth of U.S. households has risen 29% since bottoming in the first quarter of 2009. But when stocks are excluded, the gains are only 21%, Fed data show.
It's not just households that are piling on debt. Overall debt growth, including businesses and government, grew at the fastest annualized pace since the third quarter of 2008. Non-financial companies are taking advantage of the Federal Reserve's low-interest-rate policies by taking on more debt, often through issuance of corporate bonds.
Chris Shannon, who works for a company that makes fire-protection systems for commercial buildings, is among those returning to borrowing.
The 27-year-old had roughly $3,000 in credit-card debt after he graduated from college in 2009—but has since been able to slowly pay it off along with debt related to his car. Now he has about $10,000 in student-loan debt. His fiancée doesn't have any debt. The couple is planning to take on more debt to purchase a home in Dallas.
"We're definitely ready to borrow," Mr. Shannon said. "You can feel the economy starting to turn around."
