How are today's consumer finance trends influencing the consumer market? Consumer spending is a critical factor of overall economic health, driving 70 percent of all economic activity in the U.S. By taking a look at these major economic indicators, entrepreneurs can operate under a better understanding of how their markets (and their businesses) may move--and more importantly, grow--into the future. These four consumer spending trends are a valuable gauge for how future consumer markets will develop.
1. Revved-Up Spending. Consumer spending rose $18.3 billion, or 0.2%, in May after no gain in April. The two months followed a healthy spending surge of $107.2 billion, or around .08% in March. Consumers are finally beginning to return to their pre-recession attitudes around spending. The improvement in the economy, supported by a budding housing market and sustained corporate growth, is finally bringing consumers back from the conservative recession-spending mentality. Americans are more confident in their financial prospects and are revving up their purchases, spending more freely than they were a year ago.
2. More Credit Availability. One of the biggest problems during the financial crisis and economic recession was the credit crunch, when few banks were willing to lend money to borrowers. Just as consumers have become more responsive to lenders, banks have become more open to potential borrowers than they were during the recession. While many of the larger banks continue to enforce firm lending restrictions, smaller players like credit unions and community banks have been able to carve out share by offering more competitive rates.
3. Warming Up to Credit Cards. For all those who thought the last decade's debt binge was over, well, not so fast. The New York Federal Reserve released its Quarterly Report on Household Debt and Credit for the first quarter of 2014, which shows a $129 billion increase in overall household debt from the previous period. This substantial increase is a hopeful sign for the economy, suggesting that consumers are confident enough to boost their purchases by borrowing. And Americans are warming up to using plastic again. The use of revolving credit, like credit cards and other unsecured loans, jumped by more than 12% this April. What managers can interpret from this is that consumer income has increased enough to support a heavier debt load--made possible by more employed consumers, higher home and stock values, and confidence in the future stability of the economy. The April increase continued a string of healthy monthly gains and helped drive total consumer credit outstanding to a record high of $3.195 trillion in May, larger than the pre-Lehman record high of $2.59 trillion, recorded in July 2008.
4. Rising Student Debt. Student loans have been the chief driver of consumer borrowing since the recession ended in June 2009. The student and auto loan category has increased at a rapid 8.2% over the past year, almost four times the pace of gains in credit card borrowing.
The growth in student loan debt has triggered concerns about the economic impact on debt-burdened students. Yet, when it comes to student debt, it's crucial to note that in the U.S., student lending takes place through two channels: federal lending programs and the private market for student loans. While federal loan programs do come with specific and valuable borrower benefits--like IBR (income based repayment), fixed rates, and guaranteed discharge with death or permanent disability--they do distribute funds to borrowers who may not be in the best position to repay them. The result is a relatively frictionless path to debt that has led to the rise of student loan targeting in the media. What sets private student loans apart are stronger underwriting standards, which lead to lower default rates among borrowers who have been set up for success from the beginning. This distinction is important because 20 years of data on the financial well-being of American households indicates that student loan hardships are actually not a system-wide problem. Instead, borrowers are using student debt to finance human capital investments that pay off through higher wages in the future. What managers can interpret from this is that the trend in rising student debt might not actually be harmful, but could simply be a nonthreatening symptom of increased spending on higher education and long-term financial well-being.
Vince Passione is CEO of LendKey Technologies Inc. in New York City.