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5 odd signs the economy is heating up

Rick Newman
Senior Columnist
The Exchange

The recession that ran from 2007 to 2009 seemed to be good for family cohesion: The divorce rate hit a 40-year low, lots of grown kids moved back in with their parents, and the proportion of people leaving their home town for greener pastures sank to the lowest level since the idyllic 1950s.

The family cohesion, of course, was largely an illusion. What really happened was that people put off big decisions that might have hurt their budgets, no matter how much teeth-gritting it required. The economy is still iffy, as new Fed chair Janet Yellen indicated in recent Congressional testimony, pointing out that jobs are still somewhat scarce and consumer spending hesitant. And the latest data shows the economy grew more slowly at the end of 2013 than previously thought.

Yet more Americans are now making the tough decisions they put off a few years ago, which might look like bad news but actually shows people are feeling more confident about taking risks, busting a career move or going it alone. Here are five offbeat indicators of a growing economy:

A rising divorce rate. Financial stress worsens marital tension, yet the divorce rate dropped in 2008 and 2009, just as the recession intensified. That’s not surprising, since thousands of estranged spouses couldn’t bear the costs that come with splitting one household into two (not to mention the lawyers). Plus, the housing bust meant divorcing couples who owned a home had a tough time selling this big marital asset without taking a loss, adding to the burden of divorce. When the unemployment rate began to drop in 2010, however, the divorce rate began to inch back up, with 2.4 million Americans getting divorced in 2012, according to Bloomberg. Divorce can be a big financial setback for individuals — especially working women — but the fact that it’s becoming more frequent means more people have the financial resources to start over.

More people quitting their jobs. Before the recession, about 2.1% of workers voluntarily left their jobs every month to take a different job or try something new. But during the recession, the quit rate, as it’s known, fell to 1.2%. That reflected plunging job security and a lack of jobs overall,  typical in a recession. The quit rate has been rising since late 2009 and it’s now at 1.7%, or about halfway back to normal. A rising quit rate shows more people feel comfortable leaving a safe but undesirable job for one they hope offers better opportunity — the kind of risk-taking that helps keep the economy vibrant.

More subprime lending. Wells Fargo garnered some disapproving headlines recently because it has begun granting subprime mortgages again. But this is exactly what’s supposed to happen in an economy built on credit. There’s nothing inherently wrong with making loans to consumers with subpar credit scores — as long as the risks are well understood and interest rates are adjusted upward to account for the elevated risk of default. The reason subprime loans were so disastrous during the housing bust that began in 2006 is that loan underwriters completely disregarded established standards, approving mortgages for many borrowers who lacked the income to finance what they bought. When economists call on banks to ease lending standards in order to stimulate home buying and the broader economy, what they mean is extending more loans to people who are a higher credit risk. When done properly, that signals a return to normal lending standards, which is good for the economy.

More consumer debt. Americans have a love-hate relationship with debt, since it helps finance higher living standards but can wreck household budgets when there’s too much of it. A debt binge — especially on mortgages — contributed to the 2008 financial crisis and led to a surge in default rates, pushing total consumer debt down from 2008 to the middle of 2013. But borrowing for homes, cars, education and everyday purchases has risen since then. Total consumer debt was up by $241 billion in the fourth quarter of last year — the biggest jump since 2007. Since consumers use much of that debt to purchase things, borrowing boosts the economy, as long as it’s sustainable. The next thing that needs to happen: A rise in incomes, so people have more money to help sustain increased borrowing.

Fewer people headed to college. When a recession hits, it’s natural for more young people to enroll in college, since jobs tend to be scarce anyway. That’s what happened in 2008 and 2009, when college enrollments rose by two to three times as much as they did during prior years. But enrollments in undergraduate programs fell by about 2% from 2010 to 2012 (the latest data available). This was probably because more student-age Americans could find jobs and earn money, instead of paying money to attend college and, in some cases, racking up thousands in debt. There’s still overwhelming evidence that it pays to get a college degree, which is closely associated with higher lifetime earnings, better quality of work and a more fulfilling career. But when fewer people enroll, it’s usually because more are finding opportunities that don’t require a degree, in fields such as construction, manufacturing, healthcare and even business. In the future, college-skippers might regret that decision. But today, they’re helping the economy.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.