News Column

Pittsburgh Post-Gazette Len Boselovic's Heard off the Street column

June 22, 2014

By Len Boselovic, Pittsburgh Post-Gazette



June 22--Anemic, halting, lackluster are among the descriptors used to describe the recovery from the Great Recession. The release of each new data point -- whether it'?s the unemployment rate, gross domestic product, or jobless claims -- typically provides dissonant information about the direction and pace of the recovery.

Five years after economists believe the recession ended, they agree the direction is up. But the tea leaves are still sending messages open to interpretation when it comes to forecasting how far and how fast. Last week, the Federal Reserve Board lowered its 2014 outlook, sayings it expects the U.S. economy to grow no faster than 2.3 percent this year and 3.2 percent next year.

The Fed'?s latest data on consumer debt are one example of information that can can support a range of forecasts.

The central bank said nonmortgage debt -- things like student loans, car loans and credit cards -- jumped by $26.8 billion in April, reaching an all-time high of $3.2 trillion. The amount of consumer credit outstanding, excluding mortgages, as a share of disposable income reached nearly 25 percent, also a record, according to IHS Global Insight economist Kristin Reynolds.

"Continued improvements in the employment picture, as well as home and equity values, mean that consumers are starting to feel more comfortable about taking on debt," Ms. Reynolds wrote.

The same day the Fed released the consumer credit numbers, the Bureau of Labor Statistics reported that payrolls expanded by 217,000 in May to 138.5 million jobs. That marked the first time payrolls topped what they were in December 2007, when the recession began.

That was good enough to reduce the unemployment rate to 6.3 percent. However, 9.8 million Americans remain unemployed, down 1.9 million from a year ago. The jobless include 3.4 million who have been out of work for 27 weeks or longer.

Household wealth numbers are also looking up, thanks to the housing recovery and the stock market. The S&P 500 rose 30 percent last year and is up another 6 percent this year. According to the Fed, the net worth of U.S. households was $81.8 trillion in the first quarter, up from $73.8 trillion a year ago and $57.2 trillion in 2008.

Those numbers might make people who own homes or stocks feel better off enough to take on debt, but there are plenty of people who do not fall into that category. For them, confidence will be inspired by a growth in the size of their paychecks. While income growth has been a little bit better of late, it has generally been subdued during the recovery, Ms. Reynolds said.

One of the big reasons for that was the end of the Social Security holiday day in January 2013, when the payroll withholding rate returned to 6.2 percent. Congress had lowered it to 4.2 percent in 2011 to spur the recovery. The cut provided more than a $100 billion annual windfall to workers. Restoring the 6.2 percent payroll made the monthly paycheck of someone earning $50,000 a year about $80 lighter.

That'?s a big reason why consumer credit has been growing faster than personal income during the recovery, said Alan Levenson, T. Rowe Price chief economist. As far as the Fed'?s latest consumer credit numbers, "I would not view it as a sign of consumers feeling good about themselves," he said.

Neither would Heather Murray, who oversees the educational programs of Advantage Credit Counseling Service on the South Side. The growth in consumer debt "seems to be an indication that consumers may not be able to meet their expenditures within their current income situation," Mr. Murray said.

"The feedback from consumers I speak with is that they don'?t have money to save," she said. "Things are costing more, and it'?s having an effect on their disposable income."

Some of that can be traced to jumps in food and energy prices. The government reported last week that while overall inflation increased at a 2.1 percent annual rate in May, food prices rose at an annual rate of 2.5 percent while energy prices climbed 3.3 percent.

Mr. Levenson said student loan debt, now a record $1.2 trillion, and car loans account for the bulk of the increase in debt. Credit terms for car loans have eased, allowing motorists to replace aging cars they were reluctant to retire during the recession and early stages of the recovery, he said.

Higher debt and slow income growth have resulted in a lower savings rate. Consumers were saving at about a 5.5 percent clip before payroll withholding rates reverted back to normal levels last year, Mr. Levenson said. The first quarter savings rate was 4 percent.

Mr. Levenson believes the savings rate will be flat or move a little lower over the next few years, which he said implies a small increase in consumer debt. Record low interest rates engineered by the Fed indicate that there'?s some capacity for consumers to carry higher credit balances, he said.

There is also pent-up demand for mortgages, but credit conditions there remain tight, he said.

Len Boselovic: 412-263-1941 or lboselovic@post-gazette.com

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Source: Pittsburgh Post-Gazette (PA)


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