THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Tuesday, July 11, 1995 TAG: 9507110239
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BLOOMBERG BUSINESS NEWS
LENGTH: Medium: 70 lines
Consumers may be saying ``charge it'' more and more, but growing household debt isn't likely to threaten a second-half economic rebound.
In April, consumer credit as a percentage of personal income climbed to near-record highs. A Federal Reserve report tomorrow is likely to show consumer credit rose in May for the 30th month in a row.
Still, analysts said credit-card use is up simply because plastic has become more convenient than cash. ``I don't think debt is much of a concern,'' said Bill Sharp, an economist with Smith Barney Inc. in New York.
Installment credit, which includes credit-card and automotive loans, but not home equity loans, probably rose by $9.0 billion during May, according to analysts.
There's no disputing that consumer debt is close to record highs. In April, consumer credit was about 15.9 percent of total personal income, close to the recent high of 16.1 percent in September 1989.
``With each cycle, the peak of the growth rate (in consumer credit) is getting higher and higher,'' Sharp said. The rate of increase in credit peaked in September 1984, when installment borrowing rose 21 percent from the previous year. From April 1994 to April 1995, credit grew by 15.8 percent.
What's less clear is whether the expansion of consumer borrowing bodes badly for household finances.
That's because the fastest growing area of consumer borrowing is credit cards, and their increasing use isn't necessarily a sign that more Americans are living beyond their means.
Credit-card balances increased at a 21.8 percent annualized rate during April, while total consumer credit increased at a 14.1 percent rate.
Analysts aren't troubled by the fast growth of credit-card balances because the reasons for credit-card use have changed since the 1980s.
Companies now offer incentives to say ``charge it!'' that range from frequent-flier miles to credits for movie rentals at Blockbuster Video stores.
Credit-card rates are also moving lower, as competition between issuers heats up. Rates still average about 18 percent to 19 percent, but some card issuers lure potential customers with initial rates of as low as 5.9 percent, Sharp said.
While those incentives make it attractive to use credit instead of cash, it's also easier, now that grocery stores, movie theaters and some universities let consumers pay with a card.
``The ability to use credit cards at grocery stores and drug stores has significantly affected the amount of revolving credit,'' Sharp said.
That's why some analysts don't think the expansion is threatened by climbing debt burdens. ``We saw good underlying income growth, so that will help keep the burden down,'' said Carl Palash, chief economist with MCM MoneyWatch in New York.
To be sure, personal incomes fell 0.2 percent in May - the first decline in nearly a year and a half - after barely rising in April. For the year so far, monthly income growth averaged 0.3 percent, barely half the 0.6 percent rate in the same period a year earlier.
``This is a sign of straining household balance sheets,'' said Raymond Stone, a managing director of Stone & McCarthy Research Associates in Princeton, New Jersey.
Credit growth often exceeds income growth in the early stages of a slowdown, Stone said.
Still, incomes likely picked up again in June, since the U.S. economy added 215,000 jobs, analysts said. That suggests it's too soon to say consumers will pull back on spending - or charging. by CNB