Consumer spending plunged in Q3, and it’s likely to continue to get worse. Why? Because U.S. consumers are broke, and the number of folks eager to lend us money despite this condition has gotten a lot smaller.
We were broke in 2000, but we were able to borrow money to spend by tapping the “equity” in our houses. Now we can’t tap that equity anymore (because it’s gone), so we’ve moved on to credit cards. Lenders are wising up to this, though. And then where’s our spending money going to come from?
John Mauldin’s weekly letter lays it all out (sign up here). First, check out the decline over the past two years in home mortgage equity withdrawals. That was a nice pot of spending money for a while. Not anymore:
Despite home equity withdrawals plunging in the last six quarters, though, until recently we did not cut spending much. We just switched creditors. Specifically, we switched from mortgage lenders to credit card companies (our emphasis):
So, did American consumers cut back on borrowing? Not if they had a credit card! Total loans from commercial banks to consumers grew by $89 billion for the 12 months ending in September. $61 billion of that was credit card debt, and the amount in recent weeks has exploded. Let’s look at this analysis from my favourite slicer and dicer of numbers, data-wizard Greg Weldon (www.weldononline.com). Going with a Halloween theme:
“FAR MORE ‘telling’ is the LOPSIDED degree to which Credit Card balance growth is ‘contributing’ to total growth in Consumer Loans, a sign of intensifying ‘stress’ on consumers, amid accelerating job loss, home price deflation, and equity-market paper wealth devaluation.
“Even the raging Frankenstein stops to note the shockingly UGLY data details:
Commercial Banks, Outstanding Credit Card Balances … SOARED by an eye-opening + $7.1 billion in the WEEK ending October 15th, representing a +1.9% single-week rate of expansion … or … nearly ONE-HUNDRED per cent annualized (+98.4%).
“Even more ‘telling’ is the ‘read’ acquired by contemplating the following pair of data FACTS:
* Credit Card Loans, 10 months Sep07-thru-Jul-08 … up + $29.1 billion
* Credit Card Loans, 10 weeks Aug-08-to-mid-Oct-08 … up + $32.3 billion
“In other words, Commercial Bank ‘exposure’ via the total amount of Credit Card ‘loans’ outstanding has risen MORE in the last 10 WEEKS, than it did in the previous 10 MONTHS COMBINED !!!
“Moreover, the growth in the last 10-weeks, $32.3 billion, or about $600 million per ‘shopping day’ since the beginning of August … represents nominal growth of + 9.3% … or … + 48.3% annualized over the last 10 weeks.
“According to American Express, delinquencies on credit payments rose to 4.1% of all credit outstanding in the 3Q, up from 2.5% in 3Q of 2007, with Bank of America’s rate rising even more steeply, to 5.9% in the quarter.
“Moreover, the ‘pool’ of loans deemed ‘uncollectable’ rose to a high 6.7% in the 3Q, soaring from 3.6% last September.”[Emphasis mine.]
What consumer spending there is has been fuelled in part by credit card. Greg notes this uncomfortable piece of data: the second largest “merchant-vendor” for credit card use is now McDonalds. This suggests that many consumers are in serious distress when they need to get their $4 Big Mac and fries with a credit card.
Catch that? The second-largest credit-card vendor is now McDonalds.
Now, let’s say you’re a credit-card lender who has just watched all your friends in mortgage finance get fired after letting their credit standards go to hell. How long are you going to keep lending to consumers at this rate? And what’s going to happen to consumer spending when you crack down?
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