Staggering consumer debt in the USA

Louis Proyect lnp3 at
Wed Apr 4 18:06:51 MDT 2001

NY Times, April 4, 2001

Market Place: Nightmare on Wall St. -- Tightfisted Consumers


``Our general feeling is the next shoe to drop in the economy is a slowdown
in consumer spending,'' said Jason Trennert, economist at ISI Group, a
broker-dealer in New York specializing in economic research. ``For us, it
is inconceivable that you could take $5 trillion out of stock market wealth
and not see a major impact on consumer confidence.''

There is no doubt that consumers are crucial to economic growth. Their
spending accounts for a significant portion of the growth in the gross
domestic product. And even as a great deal of stock market wealth has
evaporated, consumers have remained surprisingly upbeat. Consumer
confidence, while down from its peaks, bounced back in March.

Purchases of big-ticket items like new cars and homes have remained
healthy. General Motors said auto sales slipped less than had been expected
in March, indicating that consumers continue to spend in the economic

A key reason for the buying power is a still strong employment market.
According to the Labor Department, 135,000 jobs were added in February.

But consumer spending could dry up if a recent increase in layoffs begins
to multiply. Delphi Automotive Systems, Charles Schwab, Citigroup, Motorola
and Procter & Gamble have announced recently that they are cutting their
work forces. More cutbacks, economists say, are close on the horizon.

``What has become clear in the last couple of weeks is that there is excess
capacity and excess headcount beyond technology companies,'' said Liz K.
Miller, portfolio manager at Trevor, Stewart Burton & Jacobsen, a money
management firm in New York. ``Managements are going to respond the same
way they have in every other recession - through general contraction.''

The problem is that consumers have little cushion to soften the blow of
layoffs. Many of their personal balance sheets are creaking under a load of
debt, and savings are close to nonexistent. During the 90's, Americans
piled on debt. Consumer debt as a share of the gross domestic product now
stands at close to 71 percent, a new high, and up almost half from the
early 1980's. As a share of personal income, household debt has risen to 85
percent, also a record.

According to Moody's Investors Service, American households' liquid
financial assets - including savings accounts and other assets that can be
converted to cash relatively easily - dropped 13.2 percent in the first
three months of this year from the first three months of 2000. Although
these household assets as a percentage of debt are still greater than they
were from 1985 to 1990, this quarter's plunge would be the steepest since a
14.3 percent decline in late 1974, during a recession and a bear market.

And personal savings as a percentage of disposable income went into
negative territory last July, meaning that for the first time, consumers as
a whole were spending more than they had in disposable income. In January,
the figure fell to a negative 0.98 percent, the lowest ever. In February it
rose a bit, but it remains at a negative 0.91 percent.

``Indebtedness-to-income levels are as high as they've ever been,'' Mr.
Paulsen of Wells Capital said. ``You can be very indebted, but it will
never surface if everyone has a job. If we have a large rise in
unemployment, we may find out how bad the debt problem is among the lower
half of the income distribution. And that has a lot of ripples.''

Mr. Paulsen says that the recent weakness in the prices of consumer stocks
may be forecasting a decline in consumption itself in coming months. ``Even
though stock markets don't predict recessions accurately,'' he said, ``the
moves do predict speed-ups or declines in the economy. This move tells me
that three months out, we'll start to see some of these consumer statistics
really tail off.''

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Louis Proyect
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