Consumer debt is huge but remains sustainable

THE economy has stalled, so it must be time again to worry about consumer debt.

We in the financial analysis/commentary business have done this so often over the years that many of you have probably memorized the lines. But as a courtesy to those new to this scary movie, I'll reprise the plot and update it for a 2002 audience.


Recently, Americans have gone on a borrowing and spending binge like never before. (You could have said this in 1966, 1986 or 1996 and it would also have been true.)

In October U.S. households owed $1.63 trillion on their mortgages, credit-card balances, auto loans and other borrowing. That's an all-time high, up 6 percent from the previous October and almost 40 percent above the level of five years ago.


Hocked to the eyebrows, consumers are increasingly missing loan payments as the economy falters. In October 5.3 percent of the credit-card debt tracked by Standard & Poor's was in default, up from 4.6 percent a year before.

In last year's third quarter, 4.9 percent of U.S. mortgage holders were at least a month late on their payments, according to the Mortgage Bankers Association. That was the highest point since the early 1990s.

Americans owe so much that, on average, household debt including mortgages exceeded household income in 1999 for the first time since the Federal Reserve started keeping track in the 1950s.

When will consumers max out and melt down? How many Ford Expeditions, Nintendo Game Cubes and Cole Hahn pumps can we buy on plastic before we are sated or bankrupt?

On average, household debts during the Eisenhower administration equaled 55 percent of family income. Now the figure is 105 percent.

Perhaps the debt castle is about to collapse. Look out! MasterCard massacre! Ahhgghh!

"Many economists argue the current mountain of consumer debt is likely to mean trouble," The Wall Street Journal reported last week. "If the economy takes a turn for the worse, outsized debt levels and rising layoffs could cause far more personal bankruptcies, adding a new layer to the debt debacle already affecting corporations."

Economists and journalists are right to brood about the consumer balance sheet. Consumers are two-thirds of the economy, and even small changes in household borrowing and spending patterns generate big waves. But on closer inspection there seems no need for sirens and flashers. Consumer debt has been reaching all-time highs for decades, and there is no economic reason why the present all-time high is necessarily the peak before the collapse.


Previous alarms have been false. The epilogue of Lendol Calder's 1999 history of consumer credit, Financing the American Dream, offers multiple decades of worrywart headlines on the subject:

Business Week in 1949: "Is the Country Swamped with Debt?" U.S. News & World Report in 1959: "Never Have So Many Owed So Much." Nation in 1973: "Mountain of Debt." Changing Times in 1989: "Are We over Our Heads in Debt?"

Despite all the fretting, the evidence shows that even today Americans are generally coping with their heavy indebtedness and are in little danger of hitting the wall in a way that will badly damage the larger economy.

Yes, household debt as a portion of income has risen from 86 percent a decade ago - at the beginning of the last recession - to today's 105 percent. But thanks to lower interest rates the cost of the credit is less, so naturally families can afford to borrow more.

Total monthly debt payments - for mortgages, credit cards, car loans, equity lines and so forth - added up to only 13.8 percent of average household income in October.

That's well within the historical range; it was 13.1 percent when the government first calculated it in 1980. And in a day when even conservative mortgage lenders are comfortable with a 25 percent debt-service-to-income ratio, 13.8 percent doesn't seem very high.


With homeownership at peak levels, more people than ever can roll expensive credit-card debt into bargain home-equity lines. The rise of two-worker families means one partner's income can cover food, utilities and other essentials while the other's supports higher debt. A November poll by the Consumer Federation of America showed the first large drop in years in consumer concern about debt payments.

This is not meant to minimize the dangers of credit addiction. The recession is wreaking substantial debt damage at the margins.

Lenders such as Providian Financial Corp., which in a brilliant burst of strategizing decided a few years ago to focus its credit-card business on people with a history of blowing off their bills, are getting what they deserve.

Unemployment is rising. Losing a job is devastating to the heavily borrowed. Personal bankruptcies are soaring again after two years of decline, and lower-income families, who are less able to benefit from falling interest rates, are especially vulnerable.

"The lower in income you go, the worse it gets," says Brian Nottage, director of macroeconomic forecasting for "People came into this recession having credit who didn't have it in the last recession."

I don't believe the buy/borrow/work treadmill is good for Americans' mental health. But it seems to be economically sustainable for at least several more years.