Does Rising Consumer Debt Show Strength or Stress?

By Jennifer Leigh Parker, Writer,

NEW YORK ( CNBC) -- The American consumer appears to be levering-up again. But the big debate among economists is whether borrowing signals economic growth or economic strain.

According to the Federal Reserve's latest report, total consumer borrowing reached $2.5 trillion in December of last year, nearly matching the pre-recession level. Another $17.78 billion was added in January, more than the $10.45 billion expected.

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"For the first time since the recession, we're starting to see bank credit increase. That historically has been the catalyst for strong economic growth," said Paul Kasriel, chief economist at Northern Trust.

Banks constitute the largest proportion of total consumer credit lending, to which various finance companies, credit unions, savings institutions, and the government also contribute.

It follows, Kasriel said, that bank lending is the most important factor for economic growth. "It's what has been lacking up until recently in this economy."

Others are not so certain, and expect credit growth to taper off given two persistent drags on the economy: housing and unemployment.

"The consumer credit rebound is not sustainable," said Thomas Berner, an economist at UBS. While consensus estimates $10.45 billion will be added to the Fed's borrowing total, Berner is forecasting $6 billion.

"Consumer credit cannot grow as quickly as it did before because home equity was its major driver. Now a fourth of all mortgages outstanding are underwater," said Berner.

The latest industry reports show 1.1 million American borrowers are "underwater," meaning they owe more on their mortgages than their homes are currently worth.

Berner's lower estimate also hangs on the premise that the type of credit being borrowed -- mostly non-revolving (auto and student loans) -- is not as stimulative as short-term revolving credit card debt.

"Government-subsidized student loans are a huge part of consumer credit. And since state budgets continue to be strained, that will continue," said Berner.

On this point, economists agree: student loan debt inflates credit levels with little economic impact.