We began the week arguing that U.S. consumers find themselves in a credit bind, more indebted than ever just as kicking it down the road (by adding leverage or rolling existing debt further out into the future) has become much more difficult:
We continue to believe that U.S. consumers are entering a period of forced balance sheet rebuilding. Why forced? Because credit standards are tight...and likely to stay that way. If household balance sheet repair weren't effectively coerced in some fashion, we don't think it would happen.
Like many observers, we've focused primarily on the supply side of credit, both through the price of money (i.e., interest rates, and not just the fed funds rate) and its availability (i.e., lending standards, and not just in the mortgage sector). The key storyline here has been straightforward: With increasingly impaired balance sheets, banks have become less willing and able to lend as freely as they did in recent years.
Today's Wall Street Journal considers the demand side: Consumers' own willingness (eagerness doesn't seem like the right term these days) to tap into existing credit lines, let alone request new ones. With credit card delinquencies rising, growth in revolving credit is slowing abruptly.
Credit-card delinquencies are rising across the nation, a sign that some Americans are at the end of their rope financially. And these mounting delinquencies, in turn, have prompted banks to tighten lending standards, keeping people who have maxed out their cards from finding new sources of credit.
The result could be a sharp pullback in consumer spending that would further weaken the slowing U.S. economy.
Such a pullback may already be taking shape. Yesterday, the Federal Reserve reported an abrupt slowdown in consumers' credit-card borrowings. In December, Americans had $944 billion in total revolving debt, most of it on credit cards, a seasonally adjusted annualized increase of 2.7%. That was off sharply from seasonally adjusted growth rates of 13.7% in November and 11.1% in October. And it reflects the volatility in consumers' spending habits as economic growth sputters.
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Evidence is mounting that the plastic-fueled spending spree won't last. In December, an average of 7.6% of credit-card loans were either at least 60 days delinquent or had gone into default, up from 6.4% a year earlier, according to research firm RiskMetrics Group.
As Peter Goodman wrote in Tuesday's New York Times, "[T]he same nation that pioneered the no-money-down mortgage suddenly confronts an unfamiliar imperative: more Americans must live within their means."
Goodman's story, like this morning's Journal piece, invokes real consumers who are feeling the pinch. These obligatory examples tend to be tiresome, but this one, from Goodman, seems more significant than the typical cliché:
Not long ago, Elena Gamble would have looked at the Cadillac parked across the street from her modest home in Elk City, Okla., and felt a twinge of jealousy.
"We live in a small town, and everybody looks at your clothes and what you drive and where you have your hair done," said Ms. Gamble, who earns about $2,600 a month as a grievance counselor at a local prison.
Now, she and her husband--a prison guard who brings home $2,000 a month--are grappling with $10,000 in high-interest debt. They no longer go to the movies or out to eat, except occasionally to McDonald's. They quit their Internet service. Their car was repossessed. "What we say now is, 'If we can't afford it, we can't buy it,'" Ms. Gamble said.
And when she looks across the street at that Cadillac, her envy has been replaced by pity for the neighbor on the hook.
It's easy to get caught up in the economics of the rational actor. But it's important to remember that we're talking about an economic system in which culture plays an important role in shaping norms, perceptions, preferences, and, ultimately, behavior.
Note to CNBC producers: Start booking anthropologists.
Sources
Robin Sidel, Sudeep Reddy, and Jane J. Kim, "Credit-Card Pinch Leads Consumers To Rein In Spending," Wall Street Journal, February 8, 2008 (subscription only)
Peter Goodman, "Economy Fitful, Americans Start to Pay as They Go," New York Times, February 5, 2008