Impact of Consumer Installment Debt on Food Expenditures

Consumers are allocating progressively more of their income to expenditures whose payments cannot be altered in the short run. Mortgage payments have always been a factor in the budget of consumers, but in the 1980s a rapid rise in the level of consumer installment credit has raised many questions about its possible implications. Consumer installment credit has been defined as credit used to purchase durable and other goods where repayment is made in two or more installments, excluding mortgages (Eastwood 1975). Installment credit and other fixed commitments such as mortgages and insurance have first lien on consumer's disposable income. Therefore, if these fixed payments are high, food and other categories of variable living expenses must fall to compensate (Courtless 1971). Hayes (1989) suggests that consumption patterns depend in part on transitory shocks and that consumers adjust slowly to movements in price and permanent income; as well, the availability of credit is a determinant of consumption patterns. Enthoven (1957) suggests that there is a long-run equilibrium level of installment debt-to-income that can be estimated; according to Evans, Enthoven's conclusions "seems to have escaped many economists" (1969, 156). In this paper, effects of installment credit on food expenditures are of particular interest. Put another way, this paper deals with the relationship between consumer installment debt and the consumption of nondurable goods and services, in this case food. The effects of installment credit have been largely ignored in empirical applications of demand analysis (Capps 1986). This paper attempts to fill this void. The objectives of this paper are twofold. First, trends in consumer installment credit are discussed, with subsequent discussion pertaining to major causal factors. Second, because little information exists pertaining to the influence of consumer installment debt on food expenditures, a two-equation recursive model is developed to measure this relationship. TRENDS IN CONSUMER INSTALLMENT CREDIT From the 1960s to 1970, consumer installment credit showed moderate growth. Since 1970, however, growth in consumer installment credit has been astonishing, climbing from roughly $100 billion to $700 billion in nominal terms. In real terms, growth in installment credit has more than doubled over the period 1960 to 1990. In 1960, consumer installment credit accounted for roughly 12 percent of disposable income, but in 1988 it accounted for 19 percent of disposable income. Consumer installment credit rose from two percent of total assets in 1960 to three and a half percent of total assets in 1988. As a result of the economic slowdown of the early 1980s coupled with a high cost of credit as well as limits on consumer loans, consumer installment credit as a percentage of disposable income fell from 17.4 percent in 1979 to 14.6 percent in 1982. The economic recovery of the rest of the 1980s coupled with lower interest rates and deregulation of the banking industry, increased consumers' ability to borrow. From 1982 to 1988 consumer installment credit rose from 14.6 percent of disposable income to 19.3 percent. Longer maturities and continued increases in credit card use also contributed to the growth of consumer installment credit during this time period. The ratio of debt to income of 19.3 percent approaches the upper limit suggested by Enthoven's growth model, as re-estimated by Luckett and August (1985), of between 20 and 22 percent. FACTORS CONTRIBUTING TO THE GROWTH IN CONSUMER INSTALLMENT CREDIT Numerous factors have contributed to the growth in consumer installment credit over the last 30 to 40 years. Fluctuations in the level of credit have been attributed to inflation, recessions, and interest rate changes. Also, such fluctuations have been linked to changes in economic factors such as demographics, length of maturities, credit cards, and innovations in credit markets. …