U.S. Consumers Going for Broke on Borrowed Funds

NEW YORK —  The American consumer is going for broke, and may get there if borrowing continues at its current level.

Installment debt as a percentage of disposable personal income has shot up close to the record high of about 18%, or about 2 percentage points higher than a year ago. And the rate of increase may be rising.

At the same time, the savings rate has been running at less than 6%--it was only 5.2% in February, down from 6.5% last October--a rate low enough to measure near the bottom of most modern industrial nations.

“Our puny national rate of saving is an international mortification and must be substantially increased, or else,” comments James Griffen, economist for Aetna Life & Casualty, the insurer.

Meanwhile, the growth rate of disposable personal income--after taxes, that is--has been eroding. A year ago it was growing at more than 7.5% a year; early this year the rate was only half that.

Seen as Good Sign

Not everyone views the situation with alarm. Data Resources Inc., which keeps track of the numbers for many large companies, in January viewed the willingness to borrow as “a good sign for sales.”

Nevertheless, the stress is showing up in some indicators, such as a rising level of mortgage foreclosures, believed to be a consequence, among other things, of that slowdown in personal income growth.

Frustrated with waiting for prices and interest rates to become less onerous, many young couples plunged all their financial resources into homes after the last recession, leaving little reserve for job or income emergencies.

Paul A. Volcker, the Federal Reserve Board chairman, has warned that “in a real sense” the country is living on borrowed time and money.

Worse, according to Volcker, is the fact that much of the money is foreign, attracted to the United States by high interest rates and a currently strong economy. What happens, he asked, when that money returns home?

Might Be Slowing

Conceivably, that could happen when growth in the U.S. economy slows, reducing the return from equities and credit instruments. And a growing number of financial people think the slowdown might already be occurring.

Volcker recently told Congress that “the stability of our capital and money markets is now dependent as never before on the willingness of foreigners to continue to place growing amounts of money in our markets.”