This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

For Debt-Frenzied Consumer, Judgment Is Nigh

Neiman Marcus knows that consumers love to spend money. That's why it recently began selling a $10,000 custom-designed mermaid suit .

But is all this spending getting out of hand?

The data say it is. After three years of low interest rates, consumers are awash in debt. Liabilities in the household sector have risen almost 12% in the last year, outpacing asset growth by a factor of nearly three, according to Merrill Lynch.

"There's a bubble all right, and it's in debt creation," said Merrill's chief economist David Rosenberg in a recent research note. "This economy has become so addicted to leverage this cycle that it probably wouldn't take much in the way of interest rate action to tip the economic scales the other way."

According to Fed data, which came out Friday, consumer credit grew at a 6.5% annual rate in the third quarter, up from 4.8% in the second quarter and higher than the 5.8% pace in the same period a year ago. In September, consumer credit rose at an annual rate of 9.75%. The data comprise both revolving and nonrevolving debt.

Mortgage balances have surged 14% in the past year, almost double the pace of real estate appreciation and household debt-to-net-worth ratios are now sitting near all-time highs of 21.5%. Just last year, this ratio was sitting at under 20% and at the end of the 1990s it stood at 15%.

Consumers got into this mess largely because the Federal Reserve cut interest rates to a 45-year low. This enabled consumers, whose spending accounts for two-thirds of gross domestic product, to purchase homes, cars and other goods with low financing charges and to take out cheap home equity loans.

Despite these high debt levels, most economists don't expect consumers to stop spending any time soon. But the high level of indebtedness could mean that the pace of spending will be modest going forward. Some restraint might already be apparent in earnings reports Thursday by Wal-Mart and Target .

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
COF $79.28 0.16%
MXT $0.68 -28.09%
AAPL $129.25 0.12%
FB $79.39 -0.45%
GOOG $573.93 0.45%

Markets

DOW 18,202.99 -85.64 -0.47%
S&P 500 2,107.74 -9.65 -0.46%
NASDAQ 4,976.7810 -31.3150 -0.63%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs