Credit card debt is escalating rapidly, with U.S. consumers on track to add $60 billion to their credit card balances this year. That's a 55 percent hike from year-ago levels, according to credit trackers at CardHub.com.
Less clear is whether that raw number is a sign that Americans are again tumbling into debt or a sign of a strengthening economy.
CardHub, a personal finance site, warns that the average household's aggregate credit card balances are likely to jump to $7,126 by year-end, just $1,200 shy of the tipping point where balances proved unsustainable in 2008. To be sure, consumers are paying their debts more religiously than they have in decades. The credit card delinquency rate has dropped to a mere 2.89 percent, the lowest delinquency rate since 1985.
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Still, CardHub see that rising debt level as an ominous sign.
"These figures indicate that American's attitude about debt has not changed since the Great Recession," said company spokeswoman Jill Gonzalez. "We think Americans are headed down a dangerous road. We don't know when debt will hit unsustainable levels again, but we're concerned about the trend."
But some economists take the opposite view. Joseph LaVorgna, chief U.S. economist at Deutsche Bank, says the rise in consumer spending is both predictable and healthy. Consumers have been paying down debt for the past several years and are now in far better shape to spend. With a declining unemployment rate and wages starting to rise, it's about time that Americans return to the mall and car dealerships. After all, the missing ingredient during the slow recovery that followed the 2008 financial crisis has been demand among consumers and businesses.
"Consumers' willingness to borrow is a sign of confidence in their circumstances," LaVorgna said. "Borrowing levels remain relatively modest."
Indeed, U.S. families are having to spend a historically low percentage of their income to make the minimum payments on their mortgages, auto loans, credit cards and other debt, according to the Federal Reserve. Where households shelled out more than 13 percent of their disposable income to pay debts in 2007, as of June the typical household was paying less than 10 percent of their income to service their debts. In fact, the June debt service number of 9.91 percent was the second-lowest since 1980.
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"Consumers are in a better place than they have been throughout the recovery," said Peter Morici, economist and professor of international business at the R.H. Smith School of Business at the University of Maryland. "Wages are going up, the job market is firmer. For people who are working, the world has returned to normal."
Admittedly, consumers tend to have short memories, believing that the boom or bust period that they most recently experienced is likely to continue, LaVorgna said. That leads to credit cycles, where spending ebbs after a recession, slowly increasing until both consumers (and lenders) get giddy and start to weigh themselves down with more debt than they can handle.
But neither LaVorgna nor Morici see any sign of that now. Both say that today's spending is reflective of a healthier consumer and an improving economy. Meanwhile, Morici thinks the Great Recession so scarred consumers that they're likely to remain fiscally cautious for years to come.
"It's an abstraction when you hear that your neighbor has lost a house. But when it's your sister or your cousin, it's real. That scares the living hell out of you," he said. "I'm not concerned about rising spending. There is a new prudence out there. And that's surprising because before this, there was a feeling that Americans would never learn."
