Christmas will cost more this year

STAYING AHEAD

November 28, 1994|By JANE BRYANT QUINN

NEW YORK -- Attention holiday shoppers: The cost of your Christmas just went up.

The interest rate that most credit cards charge on unpaid balances varies with the bank prime rate (that's the benchmark rate for many business and consumer loans). The prime jumped three-quarters of a point to 8.5 percent two weeks ago, after the Federal Reserve increased short-term rates across the board.

Depending on who issued your card, you may owe anywhere from 3.9 percentage points to 11 percentage points over the prime. At the high end, that comes to 19.5 percent on unpaid balances.

Most cards adjust quarterly, so you normally won't see the higher rate until January. That's just in time to raise the cost of your Christmas bills.

The cost isn't going to break your back. This year's rise in the prime, since February's 6 percent low, will add $92 annually to a shopper with an average balance of $3,900. Consumers in general, however, have paid an extra $4.7 billion in credit costs so far this year, according to RAM Research in Frederick.

You may also be paying on a larger revolving balance. Credit card issuers have been raising the amount that customers can charge -- and in December many shoppers charge the max. Consumer installment debt (mainly auto loans and charge cards) now accounts for 17.5 percent of Americans' disposable income, up from 16.2 percent last year.

Mortgage rates have jumped to 9.6 percent for 30-year fixed-interest loans with no points up front (a point is 1 percent of the loan amount), says HSH Associates in Butler, N.J. First-year rates on no-point adjustable-rate mortgages are at 6.75 percent (or 6.4 percent assuming 1.2 percent in points).

But an older ARM, adjusted to the current cost of one-year Treasury bills, could jump to 9.25 percent -- although your rate normally can't climb by more than 2 percentage points in a single year.

The rate on revolving home-equity loans will rise to around 10.1 percent immediately. Average auto-loan rates at banks are 9 percent, up only 1 point in the past seven months, the Bank Rate Monitor reports.

This year's interest-rate increases will slow economic growth next year, from 4.3 percent over the past four quarters to around 2.5 percent, predicts Allen Sinai, chief global economist for Lehman Brothers. That means slower growth in jobs. But he's not predicting a recession. In his view, the Fed could raise rates another point or so without tipping over the economy.

You're enduring the slowest U.S. business upturn in modern times. But the creeping expansion is now widespread, reaching even the laggards such as New York and California. Mr. Sinai predicts that moderate growth will last for years, disappointing those who yearn for a boom but also avoiding another painful bust. "The boom/bust cycle was a loser," he says. "This is better than the old way."

Maybe so, for business profits and stocks. But not for wages -- at least, not yet. Buying power from wages hasn't increased since the start of last year, which is probably why six out of 10 Americans think the recession isn't over. That's also why they now believe that Republicans can do more than Democrats to repair the economy (the opposite belief is what elected President Clinton in 1992).

This recovery has created 5 million new jobs. Still, corporations keep announcing layoffs, it takes longer to find a new job today than it did at the end of the recession and most households continue to rely on a second earner or overtime. Median family income has dropped 8 percent since 1989, says Chemical Bank chief economist Irwin Kellner.

Michael Metz, chief investment strategist for Oppenheimer & Co., thinks that high interest rates will persist for some time, because of the sturdy worldwide demand for investment capital. In this environment, he says, U.S. stocks could move lower -- perhaps for an extended time -- even if business profits go up. That would hurt baby boomers, who are just now starting to accumulate capital for retirement.

Mr. Sinai offers a cheerier view. If investors see that higher rates don't mean recession, and slow-but-steady growth continues, he thinks they'll respond by bringing the bull market back. "But right now we're in the middle of the process," he says. "We don't know which way it is going to go."

Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y. 10022.

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