Many Plan to Trim Seasonal Spending

Despite a stronger-than-expected kickoff to the holiday shopping season, evidence is mounting that rising debt could dampen spending, or leave consumers with a nasty hangover when the bills come due in January.

The latest wet blanket on the holiday spending projections came in the form of a national survey released Monday that says bulging credit card balances may cause many families--especially households with low incomes--to curtail spending.

While a majority of the 1,000 households polled said they planned to spend as much this year as last, about one-fourth said they expect to pull back on holiday purchases, according to the survey by the Consumer Federation of America and the Credit Union National Assn., a trade group for credit unions.

Perhaps more telling, about half of the households surveyed said they are concerned about making monthly payments on their debt. For families with children, that number jumped to 61%.

“People have been spending like crazy this last year,” said Bill Hampel, the Consumer Federation’s chief economist. “They have been spending to the point that they have been having to build up new debt or draw down on their savings to finance that spending.”

The survey’s findings are consistent with warning bells that have been sounding throughout the last year.

The consumer-debt-service burden--a key measure of a household’s ability to manage its debt load--has increased this year to 13.7%, close to the record high of 14.2% in 1986.

Higher interest rates have increased mortgage payments on households with adjustable rates. And consumer installment borrowing also has continued to rise at a strong pace, up almost 9% from a year ago, according to Economy.com, a consulting firm in West Chester, Pa.

“[Consumers] are not quite as euphoric as they were last year because the stock market is not performing as well, and we’re starting to see a little bit of loosening in the job market,” said Celia Chen, Economy.com’s director of consumer services. Further, personal-bankruptcy filings have begun to nudge up, she said.

By historical measures, consumer confidence remains very strong but it has tapered off lately. And analysts say many people now worry that they won’t be able to pay off the debts they’ve been accumulating during a spending spree in recent years.

Low-income families, whose budgets have been disproportionately strained by rising debt levels, are particularly intent on trimming spending, according to the report by the Consumer Federation and the Credit Union group.

“[That] doesn’t mean everything’s going to come to a screeching halt, but it does mean we can expect consumer spending to be slower” during the holiday season as well as next year, said Hampel.

More analysts have been predicting a slowdown in spending, particularly with the stock market volatility and high gas prices. And this winter, rising energy costs will become an increasing concern as temperatures drop across the nation.

Further, interest rates are now considerably higher than they were a year ago.

While many economists think the interest rate hikes have done what the Fed intended, that is little comfort to consumers who racked up debt and are now having trouble paying it off as higher interest rates have made it tougher to pay bills.

Signs of a possible consumer pullback emerged recently when chain stores reported that sales growth sputtered in October, reaching the slowest pace since March. It was the weakest October since 1995.

The decline in the stock market, which had been a fuel to spending in recent years, may have contributed to that drop. But analysts still think some consumers are continuing to spend freely, without fully realizing the paper losses they’ve suffered in portfolios.

“Historically, they kept thinking the market would go up and up and up and they would buy based on the assets they held,” said Shantanu Dutta, professor of marketing at the Marshall School of Business at USC. “That could create a problem down the line in terms of being able to pay back if they’re charging at this time.”

Indeed, the survey released Monday didn’t indicate that people will stop charging. In fact, 54% of the adults polled said they would make at least a few holiday purchases with credit cards. And 18% said they expected to increase spending this year.

When the survey asked what they would do if Santa gave them $5,000 bonus this Christmas, most said they would save it or use it to pay off debt.