Bank stocks endured another battering last week as investor optimism about strong earnings was overshadowed by anxieties over interest rates and the direction of the economy.

During the five trading days ended on Thursday, the American Banker index of the 225 largest bank stocks slipped 0.84%.

By comparison, the Dow Jones Industrial Average rose 0.5%.

Bank bond yields also have widened because of uncertainty about the future. (See article on back page.)

The pattern did not shift on Friday, as banks' shares continued to underperform the market.

Among the latest worries is the rapid pace of consumer debt creation via credit cards, which has gone on this year in defiance of rising interest rates.

"Consumers really are spending a whole lot of borrowed money. It has to put additional pressure on the Federal Reserve to raise interest rates to control this binge," said Ingo Winzer, an economist in Wellesley, Mass.

"It's going to have the effect of pushing rates up and being bad for both consumers and the housing market," said Mr. Winzer, who writes a monthly economic newsletter monitoring real estate markets and home prices.

Credit card debt in August increased at a 26% annual rate, he noted, an "unsustainable" pace that could also fuel inflation,

On the other hand, if growth in consumer credit turns down, it will be a strong indication that the economic expansion is losing altitude, he said. It would likely also hurt bank earnings.

In part, the rapid expansion of card debt has been sparked by fierce competition among card issuers. Lower interest rates for financing card balances, along with rebates and other marketing ploys, have offset the impact ofthe Fed's credit-tightening moves this year.

"You would think that a few more people would be saving for rainy days," A . Gary Shilling, a Wall Street economist and management consultant, said Friday.

Based on the demographics of an older population, stagnating incomes, and less job security in a fast-changing economy, Mr. Shilling had expected a shift away from borrowing and toward saving.

"But it hasn't happened yet," he said. "And the only real explanation I can offer is that people don't want to give up the good life they can no longer afford, and are borrowing to bridge the gap ."

Mr. Shilling, known for fairly bearish economic views, still thinks a shift to saving will come and may be brought on by the Fed's continuing efforts to rein in the economy.

In addition to relatively lower finance charges on credit cards, Mr. Shilling offers several other ways consumers have temporarily fended off the effects of rising rates this year:

They have done it "by shifting from installment credit borrowing to mortgages, by refinancing mortgages in 1993, and by moving from variable to fixed-rate mortgages to boot," he said.

The darker side of this situation, he said, is that the Fed may be compelled to raise interest rates "much higher" to deal with the threat of inflation it perceives.

"This makes a 1995 recession all that much more likely," Mr. Shilling said, dismissing talk of a soft landing for the economy.

"The Fed has never achieved the fight touch of monetary restraint needed to slow economic growth and curtail inflationary tendencies without precipitating a recession," he said.

"The next soft landing will be the first," the economist said.

"Once the Fed starts to constrain credit, tightening persists until a recession is precipitated. The postwar pattern is clear. There are no meaningful exceptions ."

"If we are right that the Fed has the bit in its teeth and there is a recession ahead, I think a lot of people will be forced to cut the borrowing and start saving, whether they want to or not," he said.

Mr. Shilling renewed his advice to the banks, first offered 10 years ago, to focus on managing customers' assets, rather than lending, based on the anticipated shift by consumers from borrowing to saving.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.