Rising interest rates and higher gasoline prices are putting the squeeze on consumers' budgets, and many are finding it harder to keep up with their bills. Credit counseling agencies say that consumers are coming in in droves seeking help.
An important measure of consumer financial distress, late payments on credit cards, ticked up in the first quarter, according to figures from the American Bankers Association. The Washington, D.C., based trade group said the percentage of bank cards 30 or more days past due increased to 4.40 percent in the January-March quarter from 4.27 percent in the final quarter of 2005.
According to the
American Bankers Association, the situation is not at critical levels yet:
But after a two-quarter drop, credit card late payments increased to 4.40 percent at the beginning of 2006, from 4.27 percent (seasonally adjusted) in the previous quarter.
"Credit card loan payments are sensitive to financial pressures. As gas prices eased at the end of 2005, so did credit card late payments," Chessen said. "But the favorable gas-price effect evaporated during the first quarter of 2006 and it's no wonder why. The Federal Reserve continues to raise interest rates and high energy prices are taking a bite out of disposable income."
However, the bankruptcy bill may have artificially depressed the late payments statistics:
Consolidated Credit's Dvorkin pointed out that millions of Americans rushed to declare bankruptcy before the law change last fall made it harder for them to discharge unsecured debts. The high level of bankruptcy filings temporarily depressed the delinquency statistics and other measures of consumer financial distress, he said.
"Now we're seeing a new crop of people starting to get into trouble," he said. "They can't keep up. They're the ones most affected by increased gas prices and higher rates."
In other words, the number of people now entering delinquency would be higher. However, people who would be included in the statistic have already declared bankruptcy, taking them out of the delinquency statistics.
Furthermore -- as the AP story notes, -- the signs are not good for the coming months:
The Federal Reserve's decision last week to raise short-term interest rates for the 17th consecutive time will boost yet again borrowing costs for consumers, likely prompting more delinquencies on credit card bills -- as well as on auto loans and mortgages.
The slowing economy also is depressing income growth, so a greater percentage of take-home pay is going toward necessities and less is left over for debt payment.
"People refinanced (their mortgages) six months or a year ago, so the 'house bank' is empty," Williams said. "Most can't go back and tap their home equity again."
During this expansion, after inflation income growth for the bottom 80% of US wage-earners has been stagnant, as noted by the Bureau of Labor Statistics, the Census Bureau and the Federal Reserve's Survey of Consumer Finances 2001-2004. At the same time, the US savings rate is now negative as noted by the Bureau of Economic Analysis and confirmed by the FDIC.
While the US consumer has not received a meaningful wage increase for this entire expansion and has not saved, he has continued to spend. Consumer spending has increased for 56 straight quarters. To do this, the US consumer has taken on large amounts of debt. Total consumer debt as a percentage of GDP increased from 74.72% in the fourth quarter of 2001 to 90.78% in the first quarter of 2006. Over the same period total consumer debt outstanding grew at a compound annual growth rate of 11.65%. By way of comparison, total consumer debt outstanding increased from 66.38% of GDP in 1991 to 74.72% in 2001 for a compound annual growth rate of 6.6%.
Also of importance, the debt to income ratio now stands at a historical high of 126%, and increased over the last 5 years at the same pace of the last 15 years. Finally, consumer spending on food, energy, interest payments and medical expenses is now at the highest level in the last 25 years.
So - let's tie these elements together.
The US consumer has stagnant wage growth for this expansion.
The US consumer has little savings.
The US consumer has increased total debt outstanding from 74.72% of GDP in the fourth quarter of 2001 to 90.78% in the first quarter of 2006.
Consumers are spending more on necessities than at any time in the previous 25 years.
Interest rates are increasing.
The chances of meaningful wage growth are at best 50/50 now with the Fed raising rates.
As rates increase, housing slows and income growth continues to see little gains, these high levels of debt may start to hurt a whole lot more.
Update [2006-7-5 10:55:21 by bonddad]:: Thanks to Skywriter for posting this information from the Christian Science Monitor
• Even though tougher filing laws took effect Oct. 17, the number of monthly bankruptcy filings grew by more than 300 percent between November and March, from 13,758 to 49,977, according to a June report from the Administrative Office of the US Courts.
• Foreclosures on home mortgages were up 38 percent nationally in the first quarter of 2006, according to property tracker RealtyTrac Inc.
• The average American household owes more than $9,300 on credit cards, up from $2,966 in 1990, according to Cardweb.com.
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