Consumers Are Too Giddy When It Comes to Borrowing

Is there such a thing as being too happy?

Ronald Reagan was president the last time Americans were as overwhelmingly optimistic about the prospects for jobs. The latest University of Michigan survey on households’ expectations for unemployment declines in the next 12 months came in at 33 percent, matching January for the highest level since 1984, when it was 35 percent. What could be wrong with that?

History tells us that bubbles in optimism can be dangerous for the economy. For starters, an unemployment rate with a “three-handle” that is implied by the Michigan survey isn’t even in the same zip code as the Federal Reserve’s forecast for this year or next. The bottom of its 2018 range is 4.2 percent. Any notion of a gradual path of interest-rate increases would be dashed. The result would likely be an inversion of the yield curve -- which has historically preceded recessions -- and a weaker stock market.

The hard data have for some time been broadcasting what’s to come. The costs of higher education, housing and car prices have risen so much that households have had to stretch to qualify for a mortgage or make payments that are in line with the size of their paychecks.

While it’s true that “only” 11.1 percent of the $1.4 trillion in outstanding student loans are delinquent, as has been the case for four years running, fewer than half of all undergraduates are paying down their debt. The remaining are either delinquent or have asked for relief in one of two forms: temporary payment deferment or a payment plan gauged off their income level. A recent report from Goldman Sachs Group Inc. noted that, “high delinquencies will continue to constrain the ability of young households to purchase and finance homes on a forward basis.”