Surging consumer credit — bad or good news?

Late yesterday, we got some startling statistics. In the month of March, consumer credit outstanding (auto loans, credit cards, and other non-real estate loans) surged $15.3 billion. That was the
biggest rise since November and much more than the $6 billion economists were expecting. In fact, consumers took out
$34 billion in consumer loans during the first quarter, the most since 2001.

It’s generally considered healthy when consumer borrowing rises. It shows that consumers are ready and willing to
borrow and spend, promoting growth. But that’s only if the economy is strong and consumer balance sheets are in good
shape. And you probably don’t need me to tell you that is most definitely NOT the case right now.

Instead, I think consumer borrowing is surging for two UNHEALTHY reasons …

* First, falling home values and tighter mortgage lending standards have all but shut down the “housing ATM.” Borrowers had grown accustomed to taking out home equity loans and lines of
credit, then using that money to pay for vacations, boats, RVs, and more. They can’t do
that any more – either because their equity has evaporated or because banks no longer want to lend against what remains
out of fear home prices will fall further – leaving them holding the bag.

* Second, surging food and energy prices have left consumers with few options. Their incomes generally aren’t keeping pace with inflation,
so they’re being forced to use credit cards to finance even everyday purchases.

In other words, this surge in consumer credit
isn’t a sign of strength. It’s a sign of weakness. It
also leads me to believe that delinquency rates on
consumer loans will continue their upward trend.

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