The biggest question about the nation's economy right now is whether consumer spending will rebound yet again or has already peaked in this business cycle.
The issue was highlighted when the government reported that consumer installment credit outstanding fell by $4.2 billion in November. It was the first monthly drop since May 1993 and could be a harbinger of slower spending.
Since consumer spending and the credit behind it undergird economic activity, these data are crucial guides to business conditions down the road.
Economists cautioned that a trend cannot be gauged from a single month's consumer credit activity, since the figures tend to fluctuate. But the data may reflect the subdued Christmas shopping season already noted by observers.
"We may be starting to see some cracks in consumer sales," Federal Reserve Governor Susan M. Phillips said last week in Florida. She also said the current economic expansion, in its seventh year, is "getting a little long in the tooth."
In particular, Ms. Phillips said, big-ticket demand may be hurt by the large debt burden now carried by many consumers. "Consumers can't continue to leverage themselves to buy some of these larger items," she said.
In the long term, consumer spending can reasonably increase at the same pace as income growth, Ms. Phillips said. During several recent years growth outpaced income but has recently slowed.
In fact, the pace of consumer borrowing has been "more than cut in half over the past year," pointed out Edward Yardeni, chief economist at Deutsche Morgan Grenfell Inc.
Analyst Gary J. Gordon of PaineWebber Inc., who follows finance companies, said he believes consumer installment debt growth will average about 4% a year for the rest of the decade and that growth could slow to near zero on a cyclical basis by 1999.
That is far less than is being assumed by many lenders. Mr. Gordon said he is worried that excess capacity in this sector will spur a drop in profit margins.
Outlining his concerns, the analyst said, "The consumer debt burden matters, and it is probably already too high." Indeed, Mr. Gordon said, he thinks current installment debt growth is understated.
"Auto leases are not measured by the government and therefore are not included in its figures," he pointed out. "This shortfall is increasingly distorting the numbers because leasing is growing in popularity."
At the same time, home equity and debt consolidation loans are considered mortgage loans, not installment loans.
"The surge in debt consolidation, therefore, means that large amounts of installment debt are moving to mortgage debt."
Similarly, he said, student loans, which have grown sharply in recent years, are considered to be government loans rather than installment credit. Finally, he pointed out that chargeoffs reduce debt outstanding. The sharp increase in chargeoffs since 1995 has "clearly slowed reported debt growth, perhaps by as much as 2% to 3% annually." u
