For many American households, the recession was a time to pay off debt and get their finances in order—whether they wanted to or not. But according to the latest data from the Federal Reserve’s Flow of Funds (PDF), Americans are taking on debt once again. The difference is that this time we’re borrowing to finance new cars, college tuition, and other consumer goods.
As the figure above shows, American household debt peaked in 2007 and has since fallen 15 percent. Home mortgage debt accounted for much of the decline—it’s dropped 22 percent since 2007. Consumer debt, on the other hand, has continued to increase and just reached an all-time high of $3.2 trillion.
Americans have added about $100 billion of student debt a year to their balance sheets since 2008. Credit cards and auto loans have also come roaring back, particularly auto loans. The amount of outstanding auto debt is the highest it’s ever been.
Auto and credit card debt, while overall much smaller than student or mortgage loans, is in some ways more risky. Student loans and mortgage debt both finance an asset that’s expected to increase in value. A mortgage finances real estate, which has good odds of increasing in value or, at least, holding your housing costs stable for 30 years. Student debt is an investment in future earnings. There’s no guarantee, but the odds are if you finish college, your salary will, over time, recoup your investment. So while the explosion in student debt and the rising delinquency rate are troubling, at least some of the debt can be justified: It’s a leveraged investment that has a decent chance of paying off.
That’s often not the case for auto loans and goods bought with a credit card. A reliable car may be a necessary expense for some, but as an asset it’s guaranteed to depreciate. Beyond safety and reliability, there’s little investment value in buying a new car.
It seems the increase in auto spending wasn’t driven solely by Americans buying the cheapest, safest car they could find. According to the Bureau of Economic Analysis, spending on cars has increased 35 percent since the recession, almost all on new cars. Spending on repairs and net used cars has barely budged. The surge in new-car buying is partially because households that cut back on big-ticket items during the recession are spending again. But the fact that spending seems to be coming at the expense of more debt suggests Americans are putting themselves in a riskier financial position. They may have less debt overall, but an increasing share of that debt finances consumption that only declines in value.
Consumption per capita has been rising since the recession, despite stagnant income. This may revive demand for now, but the financial crisis showed that consumption, financed by debt, is not the path to resilient growth.