Consumer Debt Seen As Risk to Economy

Economists say home mortgage market is vulnerable

WALL STREET economist A. Gary Shilling asks if consumer debt will be ``the next big problem'' for the United States economy. ``The home mortgage market is vulnerable to mounting delinquencies, foreclosures, and losses to mortgage holders in a general business recession,'' says another economic consultant, James O'Leary.

In every recession, many individual consumers run into financial trouble after losing their jobs or being put on part-time work.

But some economists, such as Dr. Shilling and Dr. O'Leary, hold that consumers are entering today's recession with proportionately more debts than in previous slumps and are thus more vulnerable to reduced income.

``The risks of widespread defaults on consumer borrowing are high, starting with credit cards and extending to auto and other installment loans, and finally to home equity loans and first mortgages,'' Shilling says.

Other economists don't see consumer debt as so serious a risk to the economy. ``It isn't one of the biggest factors,'' says Paul Samuelson, a Massachusetts Institute of Technology professor emeritus of economics.

Whatever, the signs of recession in the US are multiplying. On Friday, the Labor Department in Washington announced that in December the unemployment rate climbed two-tenths of a point, to 6.1 percent. That is the highest level since mid-1987. The number of unemployed grew by 263,000 to a total of 7.6 million.

Sears, Roebuck and Co. announced Thursday if will slash about 21,000 jobs from its payroll, about 17,500 of these part-time workers.

In Detroit, it was reported that retail sales of American-made cars and trucks fell 1.4 percent in the Dec. 21-30 period, ending a year in which sales were off 5.1 percent from 1989.

Factory orders for manufactured goods in November took their steepest one-month plunge on record. An index of new orders maintained by the National Association of Purchasing Management fell to its lowest point since the last recession in 1982.

A majority of economists expect the current recession to be a moderate one. But even that will prompt more layoffs in the months ahead as businesses attempt to reduce costs.

Shilling warns in a report: ``Not only is a high proportion of consumer spending financed by debt, but people with big debt problems and pressing creditors may just be cautious about spending, to put it euphemistically.''

Another economist, Michael Cosgrove of the University of Dallas, sees the biggest risk on the consumer side arising from falling home prices. Homeowners, seeing a major portion of their ``wealth'' declining, will be less inclined to spend their money.

``That is probably one reason why consumer confidence is down,'' he says.

The ratio of consumer and mortgage debt outstanding to disposable personal income (gross income minus taxes) has risen from about 61 percent at the end of the last recession in late 1982 to more than 81 percent now. In the same time span, the average maturity of auto loans has risen from 46 months to 54.6 months as car buyers sought more manageable payments.

Moreover, many homeowners have been taking second mortgages on their homes to pay for cars, schooling, or other major expenditures, partially because of their tax advantages.

Home equity (the portion of a home's value actually belonging to its owner after debts) has declined from around 48 percent of total home value in 1982 to about 30 percent early last year, a post-war low.

Home mortgage debt has shot up by 170 percent, from $891 billion at the end of 1979 to $2,404 billion at the end of 1989.

Shilling sees many people with home equity loans as vulnerable to falling home prices, and defaulting on their mortgages. Some homeowners, seeing their house worth less than their debts on the house, simply move out and mail their keys to the mortgage holder. Some get away with it; some are pursued by their creditors.

Personal bankruptcies have risen from about 300,000 across the US in 1982 to around 810,000 in the year ending last Sept. 30. To some degree, that rise results from a 1970s change in the bankruptcy laws making it easier for individuals to escape their debts.

``It is a way of overspending at somebody else's expense,'' says Dr. Samuelson.

Consumer debt (not including mortgages) has expanded from $419 billion at the end of 1979 to $920 billion by the end of 1989, or by 119.5 percent.

The American Bankers Association recently reported that credit card delinquencies leaped to 4.01 percent in the third quarter of 1990, from 3.46 percent in the second quarter.

O'Leary estimates that at the end of the third quarter a total of $18.7 billion of the nation's residential one-to-four family mortgages were past due 90 days and $8.2 billion were in process of foreclosure. It could get worse, he figures.