How Heavy Are Debt Burdens?

Economy watchers are beginning to wonder whether the huge buildup in installment debt since early 1993 is starting to put a serious dent in consumer spending. Especially troubling in light of current retail sluggishness and poor Christmas sales projections are the recent surges in credit-card delinquencies and personal bankruptcies (chart).

Up till now, experts have tended to play down the rise in installment credit--to a record 18.9% of disposable income--on the grounds that it mainly reflects the growing "convenience usage" of credit cards. But after adjusting for this trend and the debt implicit in cars acquired via leases, economists at DRI/McGraw-Hill find that installment credit is still at peak levels.

Further, the big upticks in installment debt seems to be concentrated among low- and middle-income groups. According to a Federal Reserve Board survey, between 1989 and 1992, the percent of households with credit-card debt jumped from 13.4% to 23.7% among households with earnings under $10,000, and from 29.1% to 43.2% among families with incomes from $10,000 to $25,000. Use of credit-card debt by families with incomes above $50,000, on the other hand, actually shrank.

Economist Mark M. Zandi of Regional Financial Associates believes that the credit woes of low- and middle-income groups--those with incomes under $50,000--are behind rising bankruptcy and credit-card delinquency rates. With meager financial assets, he notes, "these groups have hardly benefited from 1995's huge runup in stock and bond prices."

The underlying issue then, muses Zandi, is whether the lack of income growth plaguing most American families for two decades is finally starting to undermine the aggregate economy. The theory has been that rising consumption by more affluent households would keep the economy on an even keel. The reality, however, may be that it was the growing reliance of low- and middle-income families on borrowing to maintain living standards that provided essential fuel for economic growth.

"Rising retail bankruptcies, softening sales, and growing credit-card delinquencies," says Zandi, "all suggest that the economy is less resilient and more vulnerable to a spending contraction than many people believe."

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