Boom Rolls On--Toward Bust? : Nation’s Consumer Credit System May Be Getting Out of Hand

The great consumer boom rolls on. In the past four years Americans have bought 42 million cars, 24 million refrigerators, 84 million television sets and more than 38 million microwave ovens. Consumer spending is now at its highest level (as a proportion of gross national product) in more than 30 years. Although the boom has stimulated imports, its strength also has kept the economy going despite huge trade deficits. The great consumer boom is worrisome precisely because it has been so strong and has lasted so long; its end could trigger a recession.

Few economists expect that, but then again economists didn’t predict--and can’t now quite explain--the consumer spending spree. The boom should delight those who feel that our economy moves according to deep impulses in the national mood and culture. It’s as if America celebrated the end of the 1981-82 recession by embarking on a collective buying binge. Since 1982, household debt has risen at about twice the rate of after-tax income.

The credit arrives in many ways. The American tradition is that a privilege available to some should ultimately become available to all. Spencer Nilson, who runs a newsletter about credit cards, says that the number of bank credit cards, 186 million in 1986, has risen 68% since 1980.

More traditional loans have also flourished. Since late 1982, auto loans have doubled to $242 billion. With declining interest rates, many homeowners refinanced mortgages and borrowed--for current spending--against their homes’ appreciated values. Sales of both new and existing homes have been strong, triggering further consumer spending.

This spending and debt explosion ought to sober those who blame all excesses in the economy on huge federal budget deficits. It’s not true, as they’re inclined to argue, that consumers are just spending the tax cuts that they received in 1981. People are spending beyond their incomes.

The result is that the personal savings rate last year was only 3.8%; out of every dollar of after-tax income, Americans saved less than 4 cents.

Of course, lower savings and higher spending are a natural part of most recoveries, as Lyle Bramley, chief economists for the Mortgage Bankers’ Assn., points out. In a recession, worried consumers postpone big purchases--cars, homes, furniture--and pay off debts. When the economy revives, there’s a backlog of demand and debts are down. But recent borrowing is so large that it could affect economic growth. Consumers provide two-thirds of the economy’s total spending. If they feel over-extended and cut back sharply, the loss would be hard to make up.

The high spending is especially perplexing because the 1981 tax changes were supposed to spur saving. The usual explanations of the puzzle are all plausible, but none succeed entirely:

- The Rising Stock Market--Feeling richer, people spend more from their current income or even sell some of their stock. The trouble with this theory is that stocks are owned mostly by pension funds, insurance companies and high-income individuals. At the end of 1986, stocks on the New York Stock Exchange were worth $2.2 trillion, up 70% in four years. But the gain probably raised consumer spending only slightly.

- Demographics--The biggest portion of the baby boom is currently between the ages of 23 and 34, precisely when people spend the most and save the least because they are starting families and buying homes. Also, the rising proportion of elderly people depresses savings, because the aged typically run down their savings in order to pay their daily expenses. These trends exist, but they haven’t changed enough recently to cause the dramatic fall in the rate of savings.

- Statistics--Economists debate how well the government measures personal savings. All the savings figures cited above come from the Commerce Department. Other estimates from the Federal Reserve show much higher savings. In 1982, when the Commerce Department had savings at about 7% of after-tax income, the Federal Reserve estimate was 11%. But both measures have dropped by nearly half in the past four years, and they tell the same story--Americans are saving less and spending more.

The interesting thing is that the longer the consumer boom has lasted, the less economists worry that it will end. Forecasters generally see continued, though somewhat slower, increases.

Various theories are offered to minimize the threat of consumer debt. Loan maturities are longer, requiring smaller monthly payments. Some car loans, for example, now exceed five years. Interest rates are lower. As more families borrow, the rise in total consumer debt doesn’t necessarily mean that the burden on individual borrowers is rising.

All this is true, but it’s also true that both loan delinquencies and credit losses are increasing.

And so the consumer boom rolls on, dogged by doubts. Could our eager, democratic merchandising system of credit be getting out of hand? It’s a troubling thought.