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Household borrowing rates provide promise for economy's continued recovery

Gradually, consumers have been tightening up their balance sheets and cleaning their credit profiles while the nation continues to climb out of the worst economic recession experienced since the 1930s.

Household borrowing rates increased significantly during the fourth quarter of 2013, a sign that American consumers may finally be back on their feet and that the lending environment is returning to something resembling normalcy.

According to a recently released report by the Federal Reserve Bank of New York, consumer debt levels rose more in the fourth quarter than they had at any other time over the past six years. Americans were again borrowing at pre-recession levels, for the purposes of everything from homebuying, auto purchases and education. Total household debt increased by $241 billion - or 2.1 percent - to a level of $11.52 trillion, the largest single-quarter gain since the third quarter of 2007. The overall household figure also represents a $180 billion increase from the fourth quarter of 2012.

The reasons consumers are assuming more debt again are varied, but in general, it's a promising sign that the dynamics of the current economy may finally be reflective of those that prevailed prior to the economic downturn - at least in terms of borrower capabilities.

"After a long period of deleveraging, households are borrowing again," said Wilbert van der Klaauw, senior vice president and economist for the New York Fed.

Making room for loans 
Another promising indicator comes in the level of total indebtedness, which is still more than 9 percent lower than it was at its peak of $12.68 trillion during the third quarter of 2008. Gradually, consumers have been tightening up their balance sheets and cleaning their credit profiles while the nation continues to climb out of the worst economic recession experienced since the 1930s. According to a Bloomberg report detailing consumer confidence, the consensus outlook on the economy actually improved over the first week of February despite uninspiring returns from labor reports, manufacturing sectors and the homebuilder confidence surveys. The Bloomberg Consumer Comfort Index rose to a level of minus 30.7 for the week ending Feb. 9, up from a reading of 33.1 for the prior period.

"Signs that consumers are starting to releverage again and take on more debt is consisent with the idea that we're turning a corner on the recovery," Tim Duy, a professor at the University of Oregon and a former U.S. Treasury economist, told Bloomberg.

Separate figures from a recent Commerce Department report also revealed that household spending is again on the rise. The quickest estimated pace of growth in three years resulted in a 3.2 percent spike for the fourth quarter, according to data released Jan. 30. Much of the rise in consumer borrowing was buoyed by elevated mortgage balances, which increased 1.9 percent to a total of $8.05 trillion. Home retention rates have also steadily improved, with foreclosures beginning 2014 at their lowest national levels since 2005.

"[The increased mortgage debt] is consistent with the improvement in the housing market we've seen," said Duy. "Sooner or later, that was going to translate into higher levels of mortgage debt."

Also contributing to the renewed levels of confidence exuded by consumers were rising home prices, which have helped many homeowners regain equity and renewed borrowing room. The S&P Case-Shiller home price index for 20 major U.S. cities rose more from November 2012 through November 2013 than it had at any time in the eight years prior, although most indications are that appreciation rates will slow throughout 2014.

Borrowing rates ballooning
The New York Fed report also revealed that auto debt expanded by $18 billion nationally in the fourth quarter, to a total of $863 billion. Credit-card borrowing totals rose similarly by $11 billion to an estimated $683 in nationwide consumer debt. Delinquency rates, meanwhile, fell again during the final quarter of 2013, finishing the year at a 7.1 percent, compared with 7.4 percent to close the third quarter. For the entire quarter, there were approximately 332,000 new bankruptcies, a figure that was similar to the number from the final quarter of 2012.

One form of debt trending in the wrong direction was that of student loans, which swelled from an outstanding $114 billion to $1.08 trillion over the course of just one year. During the final three months of 2013 alone, according to New York Fed data retrieved from its Consumer Credit Panel, borrowing for education increased by $53 million. That form of debt remains the most troubling as far as lenders are concerned, since in many cases it prevents recent college graduates from saving enough for down payments or building enough credit to get them approved for a loan.

Still, household wealth is up in the U.S., with the net worth of households and non-profit groups growing considerably from the third quarter to the fourth - from $1.92 trillion to $77.3 trillion. If that figure, along with improved delinquency rates, are any indication, Americans are generally in a better position to assume and repay their debts.