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
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

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

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

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
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, 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
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

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

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
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!
DOW 16,493.37 -69.93 -0.42%
S&P 500 1,925.15 -5.52 -0.29%
NASDAQ 4,352.6390 -17.1340 -0.39%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

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