Spending for a Rainy Day

Some time during this Christmas season, a father selecting a suit for his son or a sugar daddy eying a bauble for his woman friend will pull out a plastic credit card to pay for it, and the U.S. consumer will be $1 trillion in debt. Figuring that in an inflationary period the wise person borrows while the fool saves, the consumer has been piling on debt at a quickening rate, buying new houses, new toys and just about everything else. Private debt now averages more than $4,600 for each man, woman and child in the U.S.

Federal Reserve Board Chairman William Miller frets that the load is too heavy. So does his predecessor, Arthur Burns. Says he: "Consumers are going into debt at a reckless rate. They are counting on good luck. Let there be some weakness in the economy, and they'll be in trouble."

Retail sales were up a strong 2% in November on top of October's 1.3% rise, and the consumer is attacking his holiday shopping with gusto. Christmas sales are flat in many Midwest areas, but in Boston, Pittsburgh, Atlanta, Dallas, Houston and Beverly Hills, retailers report sales well ahead of last year. Some are even looking forward to double-digit Increases.

Dallas merchants say Christmas sales may climb by 25%. Shoppers are packing malls in suburban Houston to buy stereos, TVs and Betamax recorders. Expensive furs, jewelry, silks and cashmeres are brisk sellers everywhere. Many retailers echo the report of a luggage salesman at Chicago's Marshall Field department store: "Customers are buying better quality. It's the old philosophy of being too poor to buy cheap."

Consumer debt, the kind that results from credit-card purchases, installment buying and other small loans, has jumped since 1975, from $197 billion to $289 billion. Moreover, mortgage debt in the same period has risen from $479 billion to $701 billion because home prices have increased fast and people figure that houses are a good investment.

There is a buy-now attitude among Americans, who figure that prices are not going to go down and if they see something they like, they had better buy it now. Economist Alan Greenspan estimates that an unprecedented 25% of the average household's after-tax income now goes to meeting interest and principal payments each month, and that "there are a significant number of households that allocate 40% or more of their income to debt service."

While they spend, borrow and pay off, Americans are saving less of their incomes than in a decade--only 5.1%, which is down from the 1973-75 average of 7.6%. This may be due in part to a feeling that people need not worry about their old age because Medicare, Social Security and private pensions will take care of them, but the attitude represents a basic change in consumer psychology. When inflation ran high in past years, consumers reduced their borrowing and increased their savings out of fear of bad times ahead. This helped fight inflation by braking an economy that needed slowing.

What makes the present load bearable for the borrower is the lengthening of the repayment schedules for installment loans. Auto loans that used to run for three years can now be stretched to four or even five. Some credit-card repayments can be drawn out indefinitely for anyone who is willing to pay an annual finance charge of up to 18%.

Thus that first sign of an overextended consumer, a rise in loan delinquency rates, has yet to occur. Mortgage loan delinquencies are at an alltime low, reports Claude Pope, the head of the Mortgage Bankers Association, and the "loan collector" who used to break the thumbs of widows and orphans has been renamed a "loan counselor." But if the economy slows as expected next year, it is going to take an awful lot of counseling to advise the American people about how to carry a trillion dollars of debt.

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