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Is the average consumer in the US over his head in debt? Not necessarily

Consumer debt seems to be growing at an unsustainable pace, but just how unsustainable isn't at all clear. It grew a record $10.6 billion in September. That month's rise was directly attributable to record car sales as the automakers cleared out their 1985 models. The rise in consumer debt in September was at an almost 25 percent annual rate, and for the third quarter of the year the rise was at an annual rate of 18.6 percent. If one says that something is not sustainable, why worry about it? By definition, it will correct itself. Yes, it will correct itself, but only at the expense of something else. That was shown in the October retail sales figures released a day later. Retail sales fell the most for any month since those statistics have been kept -- some 3.3 percent.

The strength of the consumer sector in this third full year of economic recovery has been maintained largely by the consumer's use -- possible excessive use -- of new credit. That alone seems to promise a somewhat weaker rate of economic growth in 1986. Just how overextended the consumer may be, though, is not that easy to gauge. In fact, by some measures one can argue that consumers pretty much know what they are doing.

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What are those measures? Economists have all sorts of ways of judging the strength or weakness of a single set of numbers, and here is an instructive example and one that's close enough to home for us all to understand. For instance, they measure the ratio of debt to consumer income. It's income that gives us the means to pay back debt, so one has to look at levels of income to gauge whether they are growing fast enough to service all those monthly payments.

Mortgage debt as a percentage of consumer income is at a record high now, but it isn't much different from what it was in 1979. Consumer installment debt is at a high of 19.2 percent of consumer income, but it also isn't much different from back in 1979.

Furthermore, one cannot look only at the aggregate figures. One feature of the current installment debt is that larger numbers of people are making use of credit than in previous cycles. The average amount of debt outstanding looks higher because there are fewer people standing on the sidelines not using credit at all.

Another measure that economists look at is the ratio of family net worth to disposable personal income. Anyone who has owned a house that has gone up in value can sense the importance of this measure. One pays back his debt from his income stream in the first instance. But if his net worth is rising, whether from an increase in the value of his house or from a rising stock market, he feels he has a source of funds to pay off some of his debt load if his income won't take care of that need. There has bee n a lot of sophisticated testing of the so-called ``net-worth effect'' on consumer spending, and it is fairly clear that there is some correlation, however inexact the measure of it.

Last week brought huge gains in the stock market. That kind of stock price action, then, is another thing to think about in asking whether the American consumer is overextended. He may see himself just a bit differently after a week in which his net worth has risen.

So, you ask, am I overextended or not? There certainly isn't the slack in the use of credit that there once was. To that extent, one needs to be wary both about personal spending decisions and about the strength of the economy in 1986. But when measured against these other ratios, particularly net worth to personal income, the conclusion isn't written in indelible ink -- especially since, as a recent research piece from the Smith Barney, Harris Upham brokerage points out, much of the recent rise in net worth has been in the category of financial assets, which are easily translatable into cash.