The latest report by the New York Federal Reserve shows that household debt has fallen from the 2008 peak of $12 trillion. The debt level now stands at $11.5 trillion. This figure includes such items a mortgages, student loans, auto loans, home equity lines of credit and credit cards. American households have been shedding debt on a constant basis with a lower level of debt for nine of the last 10 quarters. While the lowering of debt has resulted in a slowdown in foreclosure and bankruptcy rates it has also slowed the economic recovery.
Credit card debt has lowered to represent only 6% of all household debt. Credit card limits have increased by 2% over the last quarter. Auto loans have remained flat for the same period.
The one area that has seen an increase is student loans. Many states have reduced taxpayer funding to colleges and universities to help with declining tax revenues. These cuts have resulted in higher and higher student costs resulting in higher student loan amounts. I am not sure how this will play out in the future but a student leaving college with thousands of dollars in student loan debt will place limits on their spending power.
A healthy economy needs both access to credit and reasonable debt levels. It appears American households are reconizing the reasonable debt levels part of the equation but lenders have not stepped up to their part of the equation. Without both sides doing their part, the recovery will remain a slow slog.
I am not one to want a return of the over extension we had during 2006-2008. I am happy to see households using more restraint and caution when taking on debt. A healthy savings rate for households results in a better safety cushion than we have had prior to 2008 but we must recognize the consequences of the slow down in spending as it relates to the recovery of the economy.