The thinning of America's wallets

The US economy is now skirting along the edge of deeper financial problems.

Both personal and corporate bankruptcies are on the upswing. The stock market, the great wealth creator of the 1990s, is shedding billions of dollars. And for the first time in 10 years, more people are carrying balances on their credit cards instead of paying off their monthly bills - a sign that consumers may be starting to feel the pinch. As credit-card companies are quick to note: Their losses are rising.

These problems could mean more bumps in the road ahead. Already, many merchants are expecting a less-than-wonderful holiday season - at least compared with the past few seasons. And, without a flush consumer, the US economy may not post the rebound many economists have been expecting.

"We are at a situation here where we could develop a much weaker consumer in terms of balance sheets," says Richard Curtin, director of consumer surveys for the University of Michigan in Ann Arbor. "One sign of this is the consumer has reacted to the tax rebate with a great sense of caution about their future finances." A significant percentage of people have put their rebate in savings or have used it to pay down bills.

It's not unusual - and is even logical - for economic downturns to lead to other financial problems. Companies in turmoil may not pay their bills as quickly. This can affect individuals such as independent contractors, a growing category of workers. Or, laid-off employees may defer making payments on their debt or decide to declare bankruptcy.

But economists point out that the financial problems so far are all manageable and are not as bad as those of the early 1990s, when a collapse of the savings-and-loan industry cost taxpayers $100 billion. In fact, the US banking system is considered to be in relatively good shape, considering the downturn in the economy.

"Banks are very healthy for this stage of the cycle. They are looking to make loans," says Brian Fabbri, chief economist for BNP Paribas, an investment banking firm in New York.

Yet banks are also healthy because they have changed their own game. Although they still make loans, they would rather get fees for transactions.

"The truth is that banks don't want to be lenders of money. They want to arrange financing," says John Puchalla, an economist at Moody's Investors Service in New York.

But without question, other stresses appear to be building. Personal bankruptcies are soaring. The Administrative Office of the US Courts reports that in the second quarter, new bankruptcies rose 24.5 percent over the same period a year ago.

Filings are now on track to surpass the record-breaking year of 1998, says the American Bankruptcy Institute (ABI) in Alexandria, Va.

The reasons for the bankruptcies include the rising tide of layoffs, a low savings rate, and the loss of wealth in the stock market, says Samuel Gerdano, executive director of the ABI. "People are only a handful of paychecks from needing to think about bankruptcy," he says.

Still, debt levels in the US have not surged relative to income. At the end of the first quarter, Americans owed $6.8 trillion, or 14.35 percent, of their disposable personal income. That is only slightly higher than a 13.09 percent reading in the second quarter of 1991, a recession year.

But more Americans may think they need to declare bankruptcy, in part, because bankruptcy lawyers are busy

advertising that a proposed new federal law gives creditors greater leverage. "Lawyers are placing ads that are running round-the-clock that say if you think you are in bad shape, file now," says Robert McKinley, chief executive officer of Cardweb.com, which provides information on credit cards. "What is happening is that people, if they are one or two payments late, are going straight to bankruptcy court."

Corporations are also declaring bankruptcy with more frequency. For the first six months of this year, business bankruptcies are 8.76 percent higher than for the first six months of last year. Defaults on low-rated corporate bonds are now at their highest level since the 1990s. "The slowdown this year has really weakened corporate earnings considerably," says Mr. Puchalla of Moody's.

These corporate financial problems are reflected on Wall Street, where stock prices are continuing to fall. As stock prices drop, it results in individuals feeling poorer and less inclined to spend. "It's a concern for consumers," says Mr. Curtin, who supervises regular surveys.

So far, personal balance sheets have been buoyed by higher home prices. Consumers have been busy refinancing their mortgages with less-expensive loans. In many cases, they have taken advantage of the appreciation of homes and have included that in the new mortgage.

But Curtin says some of that appreciation may be coming to an end. "We see consumers as more hesitant to upgrade or make large purchases."

Such caution may extend to the key holiday period. Early surveys indicate the consumer, watching balance sheets deteriorate, will be more cautious this holiday season. One survey suggests an increase of 2.5 percent in retail sales this holiday period. Last year, when sales increased 4.5 percent, many merchants were glum after years of 7 to 8 percent annual gains.

Says McKinley of Cardweb.com: "Christmas could be looking to be the worst in a decade."