Mounting Doubts About Debts

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Thanks to the free-spending American consumer, the current economic expansion has survived to the relatively ripe old age of three years. Many households have spent all their income, and then some. Americans have confidently, even feverishly, borrowed money in record amounts to buy everything from compact disk players to country houses. The level of home mortgage debt has increased by 37% since December 1982, to $1.5 trillion. At the same time, the total of installment debt, which includes credit-card purchases, department-store credit and the like, has surged by 67%, to $548.7 billion.

But the tide may be turning. Consumers seem to be developing a healthy concern about the debts they have amassed, and are at last restraining their spending. The Department of Commerce last week reported that the economy grew at an anemic .7% rate during the final quarter of last year, a marked decline from the Government's earlier estimate of 1.3%. For the year, the economy expanded at a respectable but far from robust rate of 2.2%.

Many experts are alarmed about the high level of consumer debt. Warns Gilbert Heebner, chief economist for Philadelphia-based CoreStates Financial, a bank holding company: "Debt problems have the potential to retard economic growth and, at worst, lead to another recession." And if a slump comes, many debt-laden families could sink into insolvency. Says Henry Kaufman, chief economist for Wall Street's Salomon Brothers: "American households as a whole have never been more exposed to a downturn."

Average household debt now amounts to 19% of annual disposable income, an all-time high. The outstanding credit balances on the 97 million MasterCards have ballooned from $11 billion to $28 billion since 1983. David Caplovitz, a sociologist at the City University of New York and author of Consumers in Trouble, estimates that between 20 million and 25 million households are financially overextended or "entangled" in debt. Says he: "Within the span of one or two generations, America has been transformed from a cash society to a credit society. People are in over their heads, and it is ruining their lives."

Some experts, though, argue that the level of consumer debt is not a major danger to the economy. Gary Wenglowski, chief economist for Goldman Sachs, a New York investment firm, notes that delinquency rates on consumer loans have not been rising dramatically. Says he: "This suggests that consumers are not having any problem servicing their growing debt."