Consumers are getting 'stretched' financially Installment debt hits record 19 percent

June 24, 1996|By THE BOSTON GLOBE

From credit card late payments to mortgage delinquencies to personal bankruptcies, American consumers seem stretched to the max, raising a yellow flag for the economy.

While the overall economy has been humming along with low inflation, a number of signs have emerged lately that consumers, who account for two-thirds of economic activity, are under stress.

Credit card late payments jumped in the first quarter to 3.53 percent from 3.18 percent a year earlier, reaching the highest level since April 1981.

The delinquency rate on home mortgages in the first quarter rose to 4.46 percent, from 3.94 percent a year ago.

And the number of bankruptcy filings -- the vast majority by individuals rather than businesses -- rose 25 percent in the first three months of the year to 266,149 nationwide, suggesting that bankruptcies for the full year might break the 1 million mark for the first time.

"Some people are getting stretched," said David Wyss, research director of DRI McGraw-Hill Inc., an economic research firm in Lexington.

"I'm concerned that debt levels are too high, but I don't think this is a major disaster for banks or the economy."

"This is maybe a yellow flag, not a red one" for the economy, said Sandra Shaber, a consumer economist at WEFA Group, economic forecasters and consultants in Philadelphia.

Reports of mounting problems with consumer debt and bankruptcies have been a sour note amid otherwise good economic news.

The economy is finishing up five years of expansion, with growth stronger than expected in the past few months. The unemployment rate remains relatively low. Home and auto sales have been brisk. And job growth has been respectable.

But now, amid signs that some consumers may have reached their debt limits and are having trouble paying their bills, economists expect lenders to tighten credit.

This could slow consumer spending, which in turn would act as a brake on overall economic growth.

Consumer spending had been an engine of the economy the past few years, but that may be changing. Consumer spending ran around 3 percent in the year's first half but will slow to 1.5 percent in the second half, predicted Shaber.

"The consumer will play a supporting role in the economy and not necessarily lead the growth," added David Cole, an economist at Technical Data, a credit market analysis firm in Boston.

Indeed, economists say credit expansion already has slowed in the past few months as lenders tightened credit. That follows a long period when lenders' purse strings were relatively loose.

Consider the credit card offers that bombard the average household. "You're inundated with all these credit card offers, with large lines of credit and initial low interest rates. I'm sure people took advantage and may have gotten themselves in a little too deep," said Cole.

Consumer installment (mostly credit card) debt as a percent of income has now reached more than 19 percent -- a record. That means the average household now owes more than two months of its yearly income, noted Wyss. Interest rates have ticked up since February, making it harder to service the debt.

"People with incomes that wouldn't have qualified them for credit cards six or eight years ago now have credit cards," said Shaber.

People with below-average incomes may be likely to reach their credit card limits more quickly or have more trouble keeping up with payments. They also have less financial cushion in the event of job loss, medical crisis or other catastrophe.

Indeed, most of the increase in credit card use has come from people with below-average incomes. Between 1983 and 1992, the percent of households with credit card debt jumped dramatically for those with incomes under $25,000 a year but dropped significantly for those in the $50,000 and up bracket.

Nicholas Perna, chief economist at Fleet Financial Group, said the recent spate of bad news on consumer debt doesn't presage fundamental problems for the economy: "The vast majority of American consumers are in pretty good shape."

Pub Date: 6/24/96

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