MAUREEN CAVANAUGH: Our top story on Midday Edition, the Federal Reserve report the consumer borrowing continued to increase through this April and May, and most economists are celebrating the surge. The number of home and car loans have increased dramatically, and credit card balances are also rising. Economists say this all indicates an economic confidence that consumers have not had in years. But it may also indicate that Americans are returning to the same old credit bubble habits that helped us get into the Great Recession in the first place. Joining me to discuss with his borrowing uptake is having on San Diego are my guests, Marney Cox, Chief Economist with SANDAG. Welcome back. MARNEY COX: Thank you Maureen, good to be here. MAUREEN CAVANAUGH: Trish Potts is with the nonprofit credit agency Money Management International, Trish, welcome to the show. TRISH POTTS: Thank you for having me. MAUREEN CAVANAUGH: Marney, what is your take on the San Diego economy now? Which areas are really doing well? MARNEY COX: In the last two years, San Diego's economy has done exceptionally well. I point to employment as a good indicator. It has increased by over 30,000 jobs each year, and about 2.5% growth rate each of those two years, far outpacing the state and nation. Recently the point that I make is the unemployment rate this past month dropped to about 5.8%. The nation is about 6.1%, this is the first time since the beginning of the recession that we have actually fallen below the national. MAUREEN CAVANAUGH: That 5.8%, if you have been tracking unemployment over the last few years, that is remarkable. MARNEY COX: That is very remarkable. It happened in a very short period of time which makes it even more remarkable. MAUREEN CAVANAUGH: Have we regained most of the ground that we lost in the recession? MARNEY COX: As of April 13, we gained all of the job growth back that we lost. Everything from that is positive. About 40,000 or so additional jobs have been added. On the unemployment side, no, we are still above where we were before the recession. MAUREEN CAVANAUGH: Let me talk about specific sectors, just so we get a feel for that. Auto sales take during the recession, as that improved? MARNEY COX: It has, it went down to about 14 million units nationwide, it is back to 17 million, which is a new high. They are back above where they were before the recession. MAUREEN CAVANAUGH: Real estate sales, and home values, the other side of the coin, have they also rebounded? MARNEY COX: They have, but they are not back above where they were. A good example of that, in 2003 we peaked with about 18,000 permits being authorized for residential units in the region. We dropped to about 3000 in 2010. Since then it has almost tripled, about 8200 last year. It has come back not nearly where it was before, long-range average to somewhere to 12,000 to 13,000 unit authorizations per year. In home prices a similar event has occurred, where we saw dramatic declines, 42% average price of the home during the recession. It is awful low, we're back up to 38%, but still not to the average that we were prior to the recession, close to 538,000, we're still about 100,000 short of that. MAUREEN CAVANAUGH: As an economist, do you see the fact that we have gained this much but have not gone back up to the top of that trust is a good thing? Everybody was talking about what bubble that was, and it had to collapse. MARNEY COX: I think the answer to that is yes, but it also matters the speed and the reasons you get there. The past bubble, we got there very fast, and that was based on an unsound foundation. This time it has taken a very long time to build back up, and the types of reasons why we are there are a little more solid than they were last time. Not that there are not concerns, a good example of that, we generate a lot of jobs, but a lot of those jobs have been low-paying, so there are quality of jobs questions out there. The personal point that you made earlier, even though people feel more comfortable going into debt, personal incomes, wage ranges have not been increasing fast, so there is still concern that we need to do more on wage growth job quality side to make the picture a little better. MAUREEN CAVANAUGH: As you well know, if you read some of the national articles about the economy, a lot of economists say the increase in credit card purchases have been fueled by home sales, because people are buying furniture, household items, do we see a listed retail sales here in San Diego? MARNEY COX: We have, this past year about 5% over retail sales not adjusted for inflation. This is a good sign. It is back to a stabilized level, it has been that level for three years in a row, pretty stable. It is below the rate of increase that we saw before the recession, but it has stabilized, to the point of the installment debt end of it. The way that this is broken into two categories, the consumer debt or credit part. The part we are talking about is the revolving credit card, maybe we buy furniture on a revolving the card piece, the other part is not revolving. The major story is not just the auto sales, but also student loans which have been a dramatic contributor to the growth in that area. MAUREEN CAVANAUGH: To the growth in personal debt people are carrying? MARNEY COX: Yes, the personal debt we're talking about is over $3.2 trillion. About $2.5 to $2.6 trillion is non-revolving credit, so the national credit card debt is smaller in the overall, about one third the level of the nonrevolving side. MAUREEN CAVANAUGH: Let me bring Trish Potts into the conversation. A lot of consumers have been holding back from making credit purchases in the recent years because they up and unsure of having a job, the economy, is what we are seeing now what we're talking about, this kind of credit card borrowing that people are engaging in, is that due in large part to pick up demand? TRISH POTTS: Well, I think it is due in part to the pickup demand. But I also think it is going without for a long time. Now they are getting comfortable, jobs are becoming a little bit more stable, and they are needed to start replacing things that they did not have the luxury of doing before. That revolving credit is where purchases are coming in, those purchases that people have held off on, nonessentials, that is typically where the revolving debt is. MAUREEN CAVANAUGH: Is that dangerous in a sense? People may get a job, get themselves out of the red, and be tempted to overuse available credit? TRISH POTTS: That certainly happens because you do want to go back to the lifestyle that you had before. We really recommend before getting into revolving or nonrevolving debt, is really evaluating financial circumstances and what can you afford comfortably for every payment plan with your credit. You do not want to charge more than you can afford to pay back because that is what led us to the recession in the first place. MAUREEN CAVANAUGH: I remember during the recession people were talking about the nation changing and people will now start buying things they can afford rather than putting so much on credit. Are you expecting to see that mindset slowly fade away? TRISH POTTS: History does have a tendency to repeat itself. Yes, potentially people can start becoming too comfortable and using credit beyond their means. We want to be very careful in making credit choices, be careful about what you're using your credit for. Avoid using it for consumables such as groceries, medication, gasoline for your vehicle. Use cash for that. Use your credit for things that you need to purchase, but cannot do all at once. Be wise about what you are charging. MARNEY COX: I wanted to say that one way to take a look at this, as you mentioned during the recession, we got to a point where we are actually spending more than we were earning. If you look at total debt, we were actually rising to a point where it was about 140% of our disposable income. It got there by us spending down savings and going into debt. That is how we were able to spend, this occurred during the early 1990s to 2006. During the recession, when people say I need to stop consuming debt, I need to start saving more, savings rose from about 1% to about 5%. People started paying down debt, some because they lost houses and lost that with it, but it dropped to about 110%. It has evened out and has begun to pick up. A stabilized rate, from an economist point of view, about 80%. We did not get back down to a level we considered as stable in the long run. Again, people are beginning to spend out of savings to help consumption as opposed to spending out of earnings which they get from wages. MAUREEN CAVANAUGH: The other side of the coin, during the recession, lenders tightened up. Credit was hard to come by, was people got credit cards canceled, home equity canceled, has that changed? MARNEY COX: It is beginning to change, not much. You can especially see it when you go into get a auto loan or home alone, critic score has to be pretty high before you will qualify. If you don't qualify it is not that they will not give you the loan, it is that the deal did they give you on the loan may be more down or a higher interest rate than you can afford. You cannot get the best rate without a good credit score, and good credit scores are harder to come with. MAUREEN CAVANAUGH: You worked with San Diego government, and even cities within the county are feeling better about borrowing, moving forward on big projects, floating bonds, but do you find that governments are more careful about big borrowing now? MARNEY COX: You see the same sort of shifting sands issue associated with local government revenue. The state continues to come in and influence what they may have been counting on for revenue in the past. It makes their future a little more uncertain. The positive side of that, along with the recession came reduce Id cost in order to build infrastructure and provide things that cities typically do. Paving streets, building bridges, new roads, buying buses, like that which the public does and our cost fell faster and more rapid than our revenue did. Actually, it increased our purchasing power for a little while. Today we're seeing many bids on construction contracts about five or 10% to low what we estimated them to be. It is still a good market for us, but our revenues are beginning to increase. We are at a little bit of the best of both worlds right now, where tax revenues have begun to rise, slowly, not dramatically, but at the same time the cost of us doing business has been about flat. MAUREEN CAVANAUGH: When it comes to personal debt, Trish, you work with people who are struggling or trying to stabilize, and stay out of debt. What are you hearing from people now? What are the struggles that they are having with managing finances and debt? TRISH POTTS: One of the biggest struggles is getting mortgages under control. So many people saw home values decrease and depreciate so much, and they fell behind on mortgages, and that is really where the big struggle is right now. Gaining control over that, and getting affordable payments, that is where the big struggle is. We are seeing a lot of people addressing collections that they have never addressed before. They are paying attention and understanding that they need to address credit and start working on paying back debt that they owe, so that they can recover financially and be able to get into better credit scores and better interest rates for lending down the road. MAUREEN CAVANAUGH: What lessons do you think that people have taken away from the credit crash, that you have taken away from clients? TRISH POTTS: The biggest lesson is being more cautious about spending. Understanding and realizing how much debt they are carrying. Five or six years ago, people would come in and you would do the math and tell them that you have $35,000 in credit card debt and they were floored by it. Now when people come in to see us, they know exactly how much they have. They are paying a lot more attention than they have in the past. MAUREEN CAVANAUGH: What are the tips that you give people to avoid credit card trouble? We heard one of them, paying for food and items like that with cash, one of the other things that people can do to not build up $35,000 worth in credit card debt again? TRISH POTTS: First of all, having credit card debt is not necessarily a bad thing. You want to be careful with your credit card debt, and marriage it managed carefully. Pay attention to what you are purchasing, how much you are spending when you purchase that, whether interest rates are going to be, and making sure what you can pay back is truly affordable in your budget. My biggest caution is, go into all purchases with your eyes wide open. If you are making purchases to supplement income, such as groceries, gas, and medication, day-to-day expenses that we have, if you're supplementing income with credit, that is when we have a problem. MAUREEN CAVANAUGH: I see. Trish makes a good point, carrying some that is not always a bad thing. What is the good side of the increase in borrowing to the overall economy? MARNEY COX: First of all, providing you can afford it, I think Trish is correct. Borrowing is okay. You have made a decision, whatever you are going to buy, you have to get that. Replacing the car, adding to your house or fixing something up, whatever it might be, it is when we start paying vacations out of home equity loans and things like that. We still owe those, maybe we could not afford it to begin with, unless you accounted for that in your budget, that is where we get on the edge. One of the things that has benefited from this whole event is the rental market. Back to Trish's point, people are being a little more cautious today about getting into debt. We're seeing people are not buying homes at nearly the same level. There are many reasons, debt is just one of those reasons. Household formation has not taken place at the same level, so the rental market has been increasing very rapidly to the point that we are producing more attached or rental units today than we are single family. It looks like a trend that may continue into the future, so there will be fewer and fewer new households formed, that actually buy a single detached home unit the way that we have seen in the past, and going into debt. There may be more condominiums or continuous renters from here on out. MAUREEN CAVANAUGH: And that may be one of the long-range effects from the recession that we see for a number of years here in San Diego. Thank you both very much.
The Federal Reserve reports that consumer borrowing continued to increase through April and May and most economists are celebrating the surge. The number of home and car loans has increased dramatically and credit card balances are also rising. Economists say this indicates an economic confidence that consumers haven't had in years.
But it may also indicate that Americans are returning to the same old credit bubble habits lead to the Great Recession in the first place.
Marney Cox is the chief economist with the San Diego Association of Governments. According to Cox, the San Diego economy has outpaced state and national growth rates.
“Over the last two years, San Diego’s economy has done exceptionally well. I point to employment as a good indicator,” Cox said. “It’s increased by 30,000 jobs each year.”
Cox acknowledged that San Diego’s unemployment rate, currently at 5.7 percent, has dipped below the national rate for the first time since the beginning of the 2008 recession.
However, with lower rates of unemployment, consumer debt levels have increased substantially.
Trish Potts with Money Management International, a nonprofit credit agency, warns that excessive consumer spending can trigger financial problems.
“You don’t want to charge more than what you can afford to payback, because that’s what lead us to the recession in the first place,” Potts said.
