Student Debt Will Negatively Impact Future Consumer Spending

Rising Student Debt Weakens Credit Story provides this caveat about expecting substantial future consumer spending strength anytime soon:

"All consumer credit isn't created equal.

Investors should bear that in mind when the Federal Reserve this week releases June consumer-credit data. If the consensus expectation for a $10.5 billion expansion is correct, total consumer credit would finally return to a 2008 high of about $2.58 trillion.

This would be another reason for cheer following Friday's stronger-than-expected jobs report. A 10th consecutive monthly increase in such credit, which excludes mortgage debt, would show one of the economy's main engines is continuing to tick over despite concerns consumers have lost confidence recently.

A fly in the ointment? The rebound in consumer credit has been fueled in large part by a leap in the amount of student debt outstanding. While things like credit-card debt and auto loans have been increasing, the rate of growth in student loans has been stronger, according to the Fed's data.

That is in part due to a 2010 change in which the federal government took over much of the student-loan business from private lenders, boosting one measure contained in the Fed's consumer-credit data. But other, wider measures of student loans also show big increases. Overall student debt is nearing $1 trillion and is now the second-largest form of consumer debt after mortgages, note Credit Suisse economists.

Student loans have increased as the recession pushed workers to go back to school or students to stay there longer. There is good reason for this: Workers with higher education have suffered lower rates of unemployment and generally have higher earnings. So this potentially provides a long-term economic benefit.

Shorter term, however, student loans don't juice the economy in the same way as increases in credit-card debt. Exclude student debt from the Fed's consumer-credit data and the total is actually down more than 15% from its 2008 peak.

Looked at that way, consumers aren't really borrowing and spending as much as the headline consumer-credit figure would suggest, says Ken Safian of Safian Investment Research. This dovetails, he adds, with personal-income data showing that while incomes are going up, expenditures are flat.

This restraint is contributing to the sluggish pace of economic growth bedeviling the Fed. It still may be a while before consumers are again ready to really shop."

Summing Up

The good news is that Americans are saving more and using our credit cards less. With respect to what that says about consumer spending growth, that's the bad news, too.

An increasingly serious new debt concern is the huge increase in student loans outstanding, thus  providing yet another one of several serious economic headwinds which are keeping the U.S. economy from any kind of healthy expansion in new jobs.

This heavy student loan debt burden, when coupled with the ~50% rate of underemployment among the young, combine to provide a stark reminder that things will remain difficult for young people for many more years.

And perhaps for the general economy, too.

Thanks. Bob.