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Tuesday, May 08, 2007

A Read And A Warning

G.19 was released yesterday, and the press coverage of it is a bit misleading. This AP story is relatively typical:
Consumers boosted their borrowing in March at the fastest pace in four months, suggesting they are remaining resilient in the face of rising energy prices and a painful housing slump.

The Federal Reserve's report, released Monday, showed that consumer credit increased at a brisk annual rate of 6.7 percent in March. That marked a pickup from February's 2.8 percent growth rate and was the biggest increase since November.
...
Use of revolving credit, primarily credit cards, rose at a sizzling pace of 9.2 percent. That was up from a 2.9 percent growth rate in February and was the biggest increase since November.
This is not, however, what actually happened. Usually, consumers pay down consumer debt (stuff like credit cards, store cards, auto loans, etc) in the first quarter. This year started out normally, but in March there was a sudden shift from the normal pattern and consumers stopped paying the debt down. The story looks at the seasonally adjusted numbers only, which of course report a relative rise. But it's not real money being spent by the consumer!

There is a difference of effect for the economy as a whole between not paying down debt and incurring new debt. New debt normally indicates higher sales to consumers in some shape or form; not paying down debt may indicate a squeezed consumer. In addition, paying down debt allows consumers to splurge later, so it is usually an indicator that the consumer (this is the United States, after all) will be spending later.

Total non seasonally adjusted consumer debt for 2006 & 2007 first quarters (billions):
Jan07: 2426.9
Feb07: 2412.7 (-14.2)
Mar07: 2411.8 (-0.9)

Jan06: 2176.9
Feb06: 2161.1 (-15.8)
Mar06: 2151.2 (-9.9)
The sharp change in pattern in March is probably mostly due to the effect of rising gas prices. If so, it certainly doesn't support the idea that the consumer will continue spending. We're going to begin to get sales reports for April, and my guess is that they will show that the consumer is continuing to hold back. I don't think the consumer wants to hold back - I think the consumer is being forced to hold back. Real incomes for most Americans are not keeping pace with inflation. There are great deals on big screen TVs and autos, that's true. But if you are just trying to pay your bills, get to work and put food on the table, your costs are rising far more rapidly than your wages or pension!

NACM CMI is a business report issued by a credit manager survey. They produce a credit index for services and for manufacturing. Their April report was better overall than the March report, which showed a very large drop in dollar collections - 7.8% overall. But the April report really isn't that positive, either. These are some of their remarks:
“While overall the report was positive, there was a disparity between the manufacturing sector, which rose 3.3%, and the service sector, which was unchanged,” stated Dan North, chief economist with credit insurer Euler Hermes ACI. He noted that comments from the respondents echo a familiar refrain that the demise of the housing market has been a major drag on distributors of goods into that industry. “Median prices on existing homes have now fallen for eight consecutive months on a year-over-year basis,” he noted. “This is an unprecedented event since house prices almost never fall, and they have never fallen for more than two months in a row in the 38 years that records have been kept.” The continued deflation of the housing market bubble as seen in this data, combined with the lagged effects of monetary policy tightening and the prospect of higher gasoline prices, suggest that the economy will continue to slow throughout the year.
A credit insurer is a company that provides protection, for a fee, against credit defaults. It is similar to a mortgage insurance company. Needless to say, such companies keep a close eye on trends; if they are caught napping, they can take a pretty good hit. House or industry economists tend to be biased a bit on the side that will make their company or industry money, so you go to people like North for an opposing view to that of economists for companies in the business of selling equities, etc.

Overall, the NACM CMI is consistent with the ISM reports for manufacturing and services - a short-term uptick (but with reduced credit amount). The worry for services is that a consumer cutting back spending in stores is likely to cut back spending for services also.

The April survey of small business confidence fell. Only 13 percent plan new hires. This is a tough number, because most job generation occurs in small businesses. NAR cut its forecasts for existing and new home sales again. ISCS is predicting a drop in retail sales in April - an unusual event. Oh - and WalMart wants to get into the health clinic business!!!!

Tomorrow TWIP will release its energy figures; there has been a major drop in short-term crude oil futures in the last week, but the logjam for gasoline is reported to be at refineries. We may not see a drop in gasoline prices even though crude appears to be on its way down again.

Last, but not least, six people were arrested for planning an attack on Fort Dix in NJ. I think all our illusions are about to get challenged.

The thing that is going to cause hedgie uneasiness is the Senate investigating off-shore hedge funds. They are looking for new taxes. Nothing is calculated to strike more fear into the hearts of the industry or to have more impact on Wall Street. I wouldn't put it past the hedgies to orchestrate a sell-off, followed by protestations from Paulson, just to put a crimp in this Senatorial initiative.


Comments:
Thank you for your excellent analysis of consumer credit. I suspect you're right that consumers cannot pay down existing debt as much as they'd like. I also wonder if there have been any changes in the credit industry that have allowed consumers to hold greater amounts of debt than in the past? Has the market for asset-backed securities tied to consumer credit proliferated in the same way that it has for mortgage-backed securities?
 
Yes, it has. Both credit card debt and auto loans are now often securitized this way.

In March, the outstanding balance of non-revolving securitized dropped. Revolving securitized rose.

It's important to see what happens in the next couple of months; the consumer side of the economy seems as if it might be in a transitional period.
 
Thanks for the link on the Fort Dix plot. Did you notice this at the end of the article? Immigration officials said Dritan Duka, Eljvir Duka and Shain Duka were illegal immigrants. What a surprise!
 
Yeah. I actually went and looked at the FBI affidavit on Smoking Gun. Another home-grown disgruntled batch of people. They don't seem to have been linked to some foreign ring or anything like that (from what was in that affidavit). The tip off was from a video store clerk, not from electronic surveillance.

They do seem to have been relatively serious, though. And if they had carried out their plan, they could have killed quite a few people.
 
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