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Monday April 30 11:49 AM ET

Debt Plus Jobless Rise Spells Trouble

By Ellen Freilich

NEW YORK (Reuters) - An ever mounting pile of consumer debt, once seen as a sign of confidence in the economy's long expansion, could soon spell trouble for the cooling economy as the jobless rate rises, economists said.

Total consumer credit grew at a 10.5 percent annual rate in February after growing at a 12.5 percent rate in January, according to the Federal Reserve (news - web sites).

In contrast, from 1996 through 2000, consumer debt grew at 7.9 percent, 4.4 percent, 5.4 percent, 7.1 percent, and 9.5 percent rates, respectively, Fed data show.

Normally, increased consumer credit is a sign of strong consumer confidence and strong spending, said Brian Nottage, senior economist at economy.com., a macroeconomic consulting firm in Philadelphia.

But now that confidence is on the wane and consumers are worried about employment trends.

The Conference Board (news - web sites), a business research group, reported that the number of consumers asserting that jobs were ``hard to get'' rose in April while the portion reporting that jobs were ''plentiful'' fell.

And consumers' income outlook also soured, with the number of consumers expecting an increase in their paychecks over the next six months down to 22.1 percent in April from 23.4 percent in March, the group said.

``What we're seeing in terms of credit card usage now does not reflect strength,'' said Nottage. ``People are using their credit cards to tide themselves over.''

Goldman, Sachs & Co. financial analyst Richard Crump agreed, describing the recent acceleration in consumer credit growth, coinciding with diminished consumer confidence, as a potential sign of consumer distress.

And for an economy in which consumer spending accounts for two-thirds of economic activity -- and with business spending also in a slump -- consumer distress could tip the economy into a deeper downturn, economists said.

Crump said in two of three episodes since 1969 when consumer credit growth accelerated as consumer confidence declined, the result was a ``severe'' drop in consumer spending.

The crucial element in avoiding that outcome appeared to be what happened to real disposable income growth, which in turn depended on the performance of the labor market.

If a resilient labor market is the shield against a further slowdown in consumer spending, the government's latest report on jobless claims was not reassuring.

The government said on Thursday that initial jobless claims rose by 18,000 to 408,000 for the week ended April 21, their highest level in more than five years. The government will release its April jobs report on Friday.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said claims are high enough to point to a 5 percent unemployment rate by the end of the summer.

``We're all watching weekly jobless claims numbers because wages are 70 percent of income,'' said Stan Shipley, economist at Merrill Lynch & Co.

Fed Rate Cuts Should Aid Consumer, But Wages Key

Shipley said the Fed's four sharp interest rate cuts in 2001 should help keep consumer spending strong by lowering the cost of consumer installment debt.

Lower mortgage rates are also vitamins for the consumer.

``Mortgage rates are down sharply so people can refinance their homes; that provides extra disposable income to households,'' said Shipley. ``If I have more money in my pocket, then I can buy more goods.''

But economists say rate cuts, and even a feistier stock market with attendant wealth gains, will not foster strong economic growth in the absence of a healthy labor market.

``The labor market holds the key,'' said Crump.

Crump cited three episodes which, like the present, were marked by strong credit growth and declines in confidence: 1969, 1972-73 and 1977-78. The first two episodes ended in recession; the third did not.

In all three episodes, falling share prices created declines in net worth. But what determined which episodes ended in recession and which did not was the level of real disposable income growth, which depends on the labor market.

In the first two cases, real disposable income growth weakened. In the 1977-78 period, however, real income growth rose steadily and remained strong thereafter.

The fallout for consumer spending was that consumer spending fell markedly during or after the periods of the first two cases but fell only mildly in the third case, Crump said.

-- (M@rket.trends), April 30, 2001

Answers

Yep.

-- Carlos (riffraff@cybertime.net), May 01, 2001.

when the sharks circle--oh baby. need a job=become a =debt-collector!!

-- al-d (DOGS@ZIANET.COM), May 01, 2001.

good one Al ;-)

I know ALOT of people laid off recently, anyone else seeing this too?

I do mean *alot*

-- sumer (shh@aol.con), May 01, 2001.

Best thing I've ever see you write AD, yes consumer, lots of people are losing jobs. Sometimes I wish I'd went to law school. Those bastards always seem to stay on top. Them and undertakers. LOL! Guess they're kinda related in the Slime Family. You know when someone dies, the law requires that the undertaker and the lawyers get paid before most other creditors in the estate. But you knew the economy was in trouble. Did you see Warren Buffet shooting off his fat face on the tube recently over the fall of the tech stocks? Man, he's getting the last laugh because he predicted this. Hell, anyone with half a brain saw it coming. Well anyone not blinded by greed. The party had to end sometime. I see a ton of SUVs for sale. When they drop low enough, I'm going to buy one, I really need a new bird bath!

-- (Weeble@wee.ble), May 01, 2001.

A kind word about an undertaker and his family in our community:

During the Depression our state paid our teachers and other state workers in something the older folks here call "scrip", and I'm not sure what word they actually mean. It was paper money issued by the state, sort of an IOU. It was only worth something if you could get someone to give you something tangible in exchange for it. Almost no one would trade for it.

Our local undertaker allowed people to pay for his services in "scrip". Eventually the "scrip" was redeemed by the state when the economy improved, so he didn't lose anything but the interest he might have made on cash payments. He provided a service to people in dire need without making them feel like charity cases.

He also bought "scrip" at a price less than the face value from people who needed cash. He did make money from this service eventually, but he made little more than he would have made in interest on cash in the bank. At the time most people did not believe the "scrip" would ever be redeemable for cash by the government. It was a very hard and desperate time.

This undertaker and his family kept a large part of our community from going under for good.

-- helen (ahem@er.uh), May 01, 2001.

The undertaker from your past was a Good Man, Helen. The undertaker,,, excuse me {cough cough},,, funeral director I have dealt with of late is a money-grubbing stump of a man who attempted to A)talk our family out of cremating our loved one; B)sell my aunt an expensive package that she could illl afford; C)foul up the paperwork for the death certificate so that it had to be done several times, if I had more time I would go after this worm's license. All I've had time to do is call the BBB and report his actions. What irks me is having to pay this slime ahead of other creditors who have done more for the community & family. I'm sure there are honest and decent funeral directors out there somewhere but he ain't one of them. And I could go on but I won't. The econ may be starting to suck bigtime but he'll eat alright.

-- (Weeble@wee.ble), May 01, 2001.

Weeble, I read an article about how to legally cremate or bury your dead. I can't remember where I saw this, and I'm pretty sure the info is several years old. Funeral directors probably aren't the best source for the info, but depending on the laws of your local community, you may only need a certain type of permit to take care of final business in a more personal (and let's face it, less expensive) way.

-- helen (fuzzy@brain.fart), May 01, 2001.

You are correct Helen. There are ways around the "system." My aunt wasn't listening to anyone when my uncle passed away, tho, if I hadn't been with her the weasel would've sold her a 7K package. Add that to the 80K or so of debts the deseased is leaving , , , NOT! The woman has to sell just about everything as it is, she's a pity package over that. Hasn't heard NO in a long time when it comes to spending. I'm the so-called Personal Representative for the estate and I'm very close to resigning. I knew it was going to be UGLY but I didn't expect Death Threats from one of the cousins who has been laid off and wants his inheritance Right Now.

Death. Money. The Economy. Would these people be more polite if times were more secure?

-- (Weeble@wee.ble), May 02, 2001.