In Positive Fed Debt Report, Hidden Danger Lurks

American consumers owe less and are paying their bills on time more, the New York Federal Reserve said in a report released Wednesday. The results certainly sound cheery, but debt data is notoriously subject to interpretation. What’s true for you is also true for the country: Some debt is good, other debt is bad, no debt is even worse, but too much debt is really, really bad. As we’ll see, the housing market recovery makes this data look better than it actually is, and a continuing rise in student loan debt still threatens the health of the economy.

So let’s unpack the Fed’s report.

Total household debt, including home loans, auto loans and credit cards, fell slightly (by $78 billion) in the second quarter of this year, enough to reach its lowest level since 2006. That’s good.

A dip in mortgage debt accounts for all of that drop and then some, the result of consumers paying down home loans and an uptick in the housing market that allows owners to sell homes and pay off mortgages. That’s good.

The rate of consumers who are more than 90 days late on a bill fell to 5.7 percent, the lowest rate since 2008. That’s great.

But consumers are taking on more debt, too. Mortgage originations, auto loans, credit card balances and student loans all rose.  That’s a mixed bag.

Some additional credit card debt is a good thing for the economy, if it represents consumers emerging from the bunker mentality of the Great Recession and feeling free enough to spend. But some of those consumers may be reverting to bad credit card spending habits, or turning to plastic as a last resort to replace missing income. The data doesn’t offer much guidance on that.

Student loan borrowing rose by $8 billion, pushing the total outstanding debt just shy of $1 trillion, at $994 billion. The total now dwarfs outstanding credit card debt of $668 billion. That’s terrible.

New auto loans surged by $14 billion, reaching their highest level since 2007. This is great news for Detroit. But is it just a re-priming of the debt bubble? Are auto dealers goosing the auto market by lending to risky borrowers again? The Fed doesn’t think so. Only 23 percent of new loans were taken by borrowers with credit scores under 620, which is historically on the low side. Good.

The Story Behind the Numbers

But there is a big asterisk attached to this good news story. Lurking inside this surge of borrowing to buy cars is an alarming truth — 18- to 29-year-olds aren’t borrowing money to buy cars anymore. They may be shunning automobiles altogether and opting for ride share programs and other alternatives, or they may simply be too busy paying off student loans to take out car loans. (The New York Fed had earlier described a negative correlation between student loans and car loans, which seems irresistibly logical.)

This younger group is taking out 50 percent fewer auto loans than it did a decade ago, and the Great Recession seems to have erased them from the market altogether. Car borrowing among this group is not recovering as it is among the older set. Detroit has a serious long-term problem.

Finally, is increased borrowing in the housing market a good or a bad thing? It’s undeniably good for people who have been stuck in underwater homes since the recession began. Earlier this year, the National Association of Realtors said the median time on market was 41 days for homes for sale, down from 72 days in May 2012. Keep a skeptical eye on the housing recovery, however. The hottest markets are — sound familiar? — Florida and California. CNBC and others are already throwing around the “B” word again, as in bubble.

Debt is neither good nor bad, it’s a tool. Gradual upticks in borrowing, accompanied by signs that consumers are repaying, is a great sign for the economy. But don’t be fooled by lower overall household debt numbers, made rosy by the inevitable housing recovery. So long as young Americans live under a rock of debt and are prevented from living as normal, 20-something consumers, the economy’s long-term health is in peril.

Image: George Doyle

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