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'Another day older and deeper in debt ...'

U.S. Consumers saddled with debt to the tune of $1.6 trillion

A lot of people today can certainly sympathize with the message that Tennessee Ernie Ford sang about in 1955 in his hit record, "Sixteen Tons." "Another day older and deeper in debt," seems as true now as it did nearly a half century ago.

Consider the load of IOUs that weight on Americans. The Federal Reserve reported earlier this month that consumer credit -- unsecured loans like credit cards and personal loans -- now stands at $1.698 trillion. Add to that nearly another $10 billion in mortgage debt and it all adds up to a lot more than 16 tons.

And, as you might expect, more and more people are falling behind on their payments. Despite rising home prices, foreclosures are on the rise. DataQuick Information Systems of La Jolla reports that lending institutions started foreclosure proceedings on 29,730 homeowners in the first quarter of this year. That's an increase of nearly five percent over the same quarter a year earlier.

The number of people past due on their consumer loans increased in the fourth quarter of last year to 3.88 percent. Almost all of the increase reflects lagging payments on credit card balances. According to the American Bankers Association, most other types of loans actually saw a reduction in late payments.

"These mixed results reflect a variety of factors that converged in the quarter, not the least of which were the Federal Reserve's three rate cuts," said James Chessen, chief economist for the bankers group. "Despite continued layoffs and marginal economic growth, it appears that the rate reductions, along with continued high mortgage refinancing and automotive financing incentives, helped keep delinquencies down."

It comes as no big surprise to people in San Diego County that rising home prices have been the saving grace in an otherwise bleak economic environment. The Federal Reserve reported earlier this month that household net worth in the United States rose to $40.2 trillion in the first quarter of 2002, an increase of 0.7 percent over the previous three months.

All of the credit for the increase goes directly to rising real estate values, which rose to $12.2 trillion, up 1.7 percent in the quarter. That helped to offset a 2.5 percent drop in the value of investments in stocks, bonds and mutual funds that fell to $5.7 trillion.

Homeowners have been quick to seize the appreciating value of their property. The Federal National Mortgage Association says that in the past 15 months, around $117 billion has been taken out from U.S. households via cash-out refinancings.

"The extra cash from refinancing has enabled households to increase their spending, which has helped cushion the slowing economy," said Franklin Raines, CEO of FNMA. "We estimate conservatively that consumer spending may increase by $40 billion this year as a result of refinancing activity."

Flush with all of these funds from refinancing, you might think that consumers would be shopping until they drop. Evidently that is not the case. Retail sales in May declined by 0.9 percent as automobile and clothing sales fell off sharply. Consumers continue to fret over the rising threats on terrorism at home and abroad. Their concern is that another attack could cripple the nation's economy and their personal finances.

The University of Michigan reported Friday that its measure of consumer sentiment fell in early June to the lowest levels since February.

"Consumers assessments of their current financial situation were more negative in early June that anytime during the past year," said Richard Curtin, who heads up the school's research team. He says the survey found that more people said their financial condition had worsened in the past year that said it had improved.

Consumer spending represents two-thirds of the nations Gross Domestic Product, or GDP, and if people stop spending the economy will be hard pressed to show any upward momentum. In other words, the consumers needs some help.

"Unless business investment picks up soon, it seems unlikely that strong housing and consumption trends can be sustained in the face of declining real wages and stock prices," said Dean Baker of Financial Markets Center, a nonprofit group that follows monetary policy. "Moreover, the impact of diminished state and local government spending has yet to be felt."

A more conservative consumer is also a more realistic consumer. The Great American Dream Survey sponsored by Hershey Foods asked people how they would use $50,000 to help achieve their dreams. A third of the 1,000 people who responded to the survey said they would use the money to pay off debts. It may not be as glamorous as a trip around the world but, all things considered, it seems to make sense.


Chamberlin's financial analysis column appears each Monday in the San Diego Daily Transcript. Chamberlin also reports daily on stocks and local business on NBC 7/39 and on "Money In The Morning" on KOGO 600 AM.

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