<U.S. Economy: Household Debt Load May Pose Threat to Spending
By Monee Fields-White 12/11 03:43
San Francisco, Dec. 11 (Bloomberg) -- Five months ago, Rina Elson looked at her $25,000 in credit-card and student-loan debt and decided she'd seen enough. She dropped cable television and long-distance phone service, found cheaper auto insurance and curtailed saving for retirement.
``I was completely over my head,'' said Elson, a 38-year-old executive assistant with a $53,000 salary. ``I wanted to get a handle on my debt before I couldn't make payments, before having to sell my car or ask my family for money.''
Debt-weary consumers like Elson may impede a U.S. recovery should more households tighten spending to service debt, economists say. U.S. household borrowing has surpassed $8 trillion and is rising at the fastest rate in almost 13 years. Personal bankruptcies are at an all-time high and mortgage foreclosures have reached a 30-year peak.
``There's a limit to how much money people can borrow before financial problems emerge,'' said Doug Greenig, head of agency mortgage trading at RBS Greenwich Capital in Greenwich, Connecticut. ``When consumers are already in so much in debt, the margin of error is reduced. The capacity to maintain a lifestyle is reduced.''
Consumers' ability to keep making monthly payments, even with historically low interest rates, rests on incomes, and some economists see a growing potential for trouble as unemployment climbs. The jobless rate rose to 6 percent in November from 5.6 percent at the beginning of the year.
Role of Incomes
In addition, higher interest rates may make it harder for consumers to meet payments on credit-card and other debts. The Federal Reserve is likely to begin lifting rates in the second half of 2003, according to a Bloomberg News survey of the biggest bond-trading firms.
U.S. household debt rose at a 9.6 percent annual rate in the third quarter, the fastest since an 11.3 percent rate in the fourth quarter of 1989, Federal Reserve figures show.
The jump in borrowing, combined with falling household wealth reflecting stock market losses, led to a 4.5 percent decline in total net worth to $38.3 trillion in the third quarter from $40.1 trillion in the prior three months and $39.5 trillion a year earlier, according to the Fed.
``It's a problematic situation because consumer spending accounts for two-thirds of the economy,'' said William Sullivan, senior economist at Morgan Stanley in Jersey City, New Jersey. ``Consumers are going to be more cautious about discretionary spending because more and more future income growth will have to be diverted to servicing outstanding debt loads.''
Cost-Conscious
New Yorkers Liz Chapman-Webb and her husband, who own a used books and music store, are among the newly cost-conscious. By cutting back on weekend outings and clothes, they've reduced their discretionary spending by a quarter and managed to stop adding to their $15,000 in credit card bills.
``It's gotten out of control,'' said Chapman-Webb, a 34-year- old legal coordinator at a cable TV station. ``The best thing to do is try to pay it off the best way that you can.''
The couple's spending included a two-week vacation to France, a washer and dryer and a computer. They pay as much as $200 a month in interest alone.
So far, declining borrowing costs have eased the burden of monthly payments. The average fixed rate on a standard credit card was 13.69 percent last week, down from 14.08 percent a year ago, according to Bankrate.com.
Rates for mortgages, which make up 71 percent of consumer debt, have averaged 6.57 percent this year, the lowest in 31 years of record keeping.
``It's not a disaster'' now, said David Wyss, chief economist at Standard & Poor's in New York. Making payments ``will be a problem when interest rates start going up.''
Impact of Rates
Debt-service payments including mortgages have risen above 14 percent of disposable income and remained there since the economy slipped into recession last year. The last time the ratio rose above that mark was the second quarter of 1987, when the U.S. was in the midst of an eight-year expansion.
The sequence of economic turns after mid-1987 shows why some economists are concerned today.
In the late 1980s, household debt rose above 75 percent of disposable incomes (today, it stands at a record 100 percent). In 1987, Fed policy makers' target rate for overnight loans between banks ranged from 6 percent to 7.31 percent.
In 1988, the Fed began to raise rates, boosting its target to 9.81 percent by May 1989, economists said. Consumer spending posted back-to-back declines in the fourth quarter of 1990 and the first three months of 1991. By July 1990, the country was in recession.
Consumers carried $3.7 trillion in credit card, mortgage and other household debt in the early 1990s, according to Fed figures. That compares with a total of $8.2 trillion in the third quarter of this year, up from $7.4 trillion the same period a year ago.
`A Land Mine'
``This is like a land mine,'' said Christopher Low, chief economist at FTN Financial in New York, the securities unit of First Tennessee National Corp. The bank is the fourth-largest underwriter of debt for agencies such as Fannie Mae and Freddie Mac. ``It's sitting out there. It hasn't blown up yet, but if interest rates go up, the more likely the land mine will explode.''
That could happen as early as the middle of next year, Low said.
Businesses have been slow to hire amid a weak recovery. Almost 1.6 million jobs have been lost since the start of last year's recession. Personal income, which was 4.1 percent higher in October than the same month a year ago, may weaken in 2003 as a result of rising unemployment, Low said.
Consumer Concern
Americans filed 391,873 personal bankruptcies from July to September, 0.2 percent more than in the previous three months and the most for any quarter since the Administrative Office of the U.S. Courts began keeping records. That brought the number of such filings over the 12 months ended in September to an all-time high of 1.55 million.
And while home buying and refinancing are setting records because of low rates, mortgage foreclosures in the second quarter rose to 0.4 percent, the highest in at least three decades, the Mortgage Bankers Association of America said. Delinquencies rose in the April-to-June period to 4.77 percent, close to a 10-year high.
More people are becoming worried, a survey of 1,000 Americans conducted in early November found. When asked their level of concern ``about meeting your monthly payments on all types of debt, other than your mortgage,'' 30 percent chose ``very concerned,'' up from 19 percent a year ago, according to the survey sponsors, the Consumer Federation of America and the Credit Union National Association.
Elson, who works at a company that manages employee stock ownership plans, reached that point in July, when she joined a credit-counseling group to help eliminate the mountain of bills. So far, she has paid off $300 on one store card and is whittling away at $20,500 remaining on at least six others as well as $3,000 in student loans. She cut her spending by $500 a month to meet a two-year goal of being debt free.
``It really does pay to look at every penny,'' she said.
©2002 Bloomberg L.P. All rights reserved. Terms of Service, Privacy Policy and Trademarks. >
quote.bloomberg.com |
