Consumer debt expected to fall, continuing trend

July 07, 1992|By Thomas Easton | Thomas Easton,New York Bureau

NEW YORK -- Underscoring the dramatic change in attitudes only a few years can make, any significant increase in consumer installment credit would come as a major surprise to financial markets.

Although a slight rise is forecast by a few economists, most predict that figures for May, which are to be announced today, will show a decline of about $500 million to $1 billion.

"It runs so much counter to what is thought of as American habit, to have anyone pay down debt," said Susan Hering, an economist at Salomon Brothers. Yet that is precisely what is occurring.

Since peaking in November 1990, consumer debt has declined about 2 percent, to $723.6 billion. That has cut debt as a proportion of personal income from a peak of almost 19 percent in the late 1980s to about 16.5 percent today. The average level in the 1970s was about 14 percent.

That decline has not been without pain. It is one of the key reasons that retailers, car manufacturers and many other

sales-oriented segments of the economy continue to struggle even as the economy is broadly perceived to have grown.

Typically, economic data are of greatest interest when they suggest a turning point. But the most intriguing aspect of the contraction in consumer debt is its persistence. The only other recent periods in which a similar contraction occurred, in 1975 and 1980, were brief.

The greatest decline has been in auto loans, which declined to $260.2 billion at the end of April, the most recent tally, from $285.5 in November 1990.

At General Motors Acceptance Corp., the financing arm for General Motors, the decline has been profound. Loans at the end of March declined about 13 percent despite a slight increase in sales.

In part, that reflected the maturing of a deluge of loans generated during record financing in 1986 and 1987, but it is also consistent with the broader changes in borrowing.

Terms for auto loans have become increasingly lenient for decades, with required down payments shrinking and the permissible period for payments stretching, recently reaching five years.

But the recent decline in debt might suggest that trend is finally ending. "There's no denying that psychology has changed, that there is less willingness to carry debt," said Robert Brusca, economist at Nikko Securities. "It's an interesting time series because it always used to go up."

Curiously, a few areas have apparently been able to weather the change. David Farris, chief executive of Beneficial Management Corp., said the growth in home equity loans, with interest rates two to seven percentage points over prime, remains good. His company continues to expand, though slowly, its portfolio of unsecured loans, which typically have interest rates of 18 percent to 25 percent.

Borrowers today tend to use the money differently, Mr. Farris said. Where they once took a trip or built a recreation room, they now use the money for necessities.

In a sign that the financial health of these borrowers might be improving, Beneficial said its write-offs for bad debts, which rose to 1.70 percent last year from the typical 1 percent, have declined a bit.

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