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Consumer Loans Could Drive Next Phase of Recovery


U.S. banks have finally started extending loans to consumers for the first time since the credit crisis began in 2008.

In the third quarter of 2010, banks issued 36 million consumer loans, up 3.7% from a year earlier, according to Equifax and Moody's Analytics. That was the first year-over-year gain since the end of 2007. Further, consumer loan originations are projected to increase 5.9% in 2011.

This lending activity couldn't be more welcome, since business spending on inventory and equipment has accounted for 90% of the 3.2% increase in the gross domestic product in the past year.

Consumers now need to come back to the markets in order for the economic recovery to continue.

Certainly, American consumers are in a better position now than they were before the crisis erupted. They have refinanced their mortgages, paid down debt, boosted the personal savings rate from 1.8% to 6.2% and, most importantly, postponed big-ticket purchases.

Over the past nine months, according to government data, disposable income has been growing at a moderate pace . And over the past six months, consumers have been taking this disposable income and increasing their spending, according to new data from the Commerce Department. In fact, credit card usage rose 10% in the fourth quarter from a year ago.

Certainly, while many consumers remain understandably nervous due to high unemployment, continued foreclosures and a general fear of too much debt, their comfort level with spending, taking out loans and investing in equities is on the mend. Banks recognize this. This improved outlook, combined with having put their personal financial houses in order, is precisely what has prompted banks to loosen their lending standards.

As JP Morgan Chairman James Dimon succinctly put it, "We see the consumer is getting stronger."

David Kelly, chief market strategist at JPMorgan Funds, believes pent-up demand will move consumers back into the stores and investors back into the markets. "With some improvement in stock market wealth, some increase in employment and pent-up demand for both housing and autos," Kelly says, "households ought to be able to contribute more to the second year of this recovery than the first."