In just the past five years, consumer debt (all household debts, excluding mortgages and home equity loans) has grown at about twice the pace of household income. This has largely been driven by strong growth in both auto and student lending.
But what does this say about the economy? Is it a sign of optimism or a cause for concern?
Rising household debt levels could mean that:
At the same time, higher debt levels could reveal financial stress as families use debt to finance consumption of necessities. It could portend new waves of delinquencies and, eventually, defaults that displace these kinds of investments. And rising family debts could slow economic growth and, of course, even lead to a recession.
This dual nature of household debt is precisely why the Center for Household Financial Stability organized our second Tipping Points research symposium on household debts. We did so this past June in New York, in partnership with the Private Debt Project
We recently released the symposium papers, which were authored by my colleagues William R. Emmons and Lowell R. Ricketts and several leading economists, such as Karen Dynan and Atif Mian. They offer fascinating insights about how, when and the extent to which household debt impacts economic growth.
Looking at all the papers and symposium discussions together, a few key themes emerged.
Despite an incomplete understanding of the drivers and mechanism of household debt, we learned that increases in household debts can boost consumption and GDP growth in the shorter term (within a year or two) but suppress them beyond that.
Whether and how household debt affects economic growth over the longer term depends on three things:
Even with record-high levels of consumer debts, most symposium participants did not see household debts posing a systemic risk to the economy at the moment, though trends in student borrowing, auto loans and (perhaps) credit card debts are troubling to those borrowers and in those sectors.
Moreover, rising debt can be a drag on economic growth even if not a systemic risk, and longer-term reliance on debt to sustain consumption remains highly concerning as well.
Public policy responses should also be considered. Factors that could further burden indebted families and impede economic growth include:
Indeed, levels of household debt have often served as a reflection of larger, structural, technological, demographic and policy forces that help or harm consumers. It only makes sense, then, that policy and institutional measures must be considered to ameliorate debt levels and their impact on families and the economy.
After all, what’s good for families is good for the economy, and vice versa.