Credit card debt has dropped here and in other regions. Likewise, consumer borrowing has dipped. Is this the emergence of the disciplined consumer, the “new normal” in spending habits? For now, yes, writes an Equifax executive. A psychology professor laments that we still rely too heavily on plastic. And a state retail expert gives a holiday sales forecast.
Moderated by Rick Badie
The new normal for now
By Trey Loughran
After significant heart-related issues in 2010, President Bill Clinton swore off his beloved cheeseburgers and doughnuts and turned to a vegan diet. Much like our 42nd president, the American economy experienced a dramatic health crisis during the last four years, putting it into a financial version of intensive care. As the U.S. economy navigates a slow, gradual recovery, American consumers seem to be adopting a financial diet of their own.
But is this an indication of a new normal where disciplined consumers can (or will) be able to sustain that diet?
Consumers have clearly lost significant “debt weight” since the recession. According to data from Equifax’s Credit Trends report, total U.S. consumer debt is down $1.5 trillion, or 11 percent, since its peak in October 2008. This was not entirely a result of patients making good choices. Financial institutions were faced with health crises and, as a result, consumers saw access to new credit or unused lines of credit severely curtailed. Foreclosures, repossessions and write-offs surgically removed more than $1 trillion of consumer obligations.
So what makes us believe the American consumer has now moved to a self-imposed diet that might result in more prudent borrowing?
Delinquencies across all major categories are down from their peak in early 2010. Credit scores trend upward. Auto sales and auto loan volumes are up, but many consumers are still getting every last mile out of their cars. The average age of cars on the road is at an all-time high of 11-plus years.
Beyond dieting, doctors also stress the importance of exercise. In the context of consumer debt, we see this exercise regimen in the form of credit-card utilization rates, which fell for a full 2 1/2 years. Credit utilization rates show what percentage of available credit consumers are using. Initially, utilization rates zoomed higher, peaking at more than 26 percent in January 2010, as banks took back unused cards and cut limits on existing cards. But then, borrowers dropped utilization by paying back a larger share of balances each month. Today the utilization rate on bank credit cards is roughly 22 percent.
The moderation of consumer credit card debt we have seen in the last year appears to be more cautious management of balances rather than a meaningful increase in debt levels. This cautious approach is perhaps influenced by deflated home values, which have continued to steadily decline.
It is encouraging that the consumer seems to be on the road to a more healthy credit diet. Will this disciplined consumer fall off the wagon and return to cheeseburgers and doughnuts? With home values and jobs still a concern across the country, the likelihood is that disciplined consumer behavior is the new normal — at least for the time being. The more important question is whether the uncertainty of issues like the European crisis and the looming fiscal cliff will put the patient back into intensive care. There’s no clear prognosis.
Trey Loughran is president of Equifax Personal Solutions.
Plastic still a problem for many consumers
By Stuart Vyse
Have Americans adopted a life of self-restraint and frugality? The evidence is decidedly mixed.
There are positive signs. Equifax reports that in August 2012, credit card debt nationwide was essentially flat relative to the previous year and had gone down in some metropolitan areas, including Atlanta.
Just as unemployment rates can decrease when people give up looking for work, total credit card debt can decrease when banks give up trying to collect on delinquent accounts. Banks regularly write off a percentage of credit card loans. But according to the Federal Reserve, since reaching a historic high in April 2010, bank “charge-offs” have decreased precipitously and are now at pre-2008 levels. Credit card debt has remained flat even as banks have written off fewer accounts.
Finally, the Federal Reserve reports the household Financial Obligation Ratio— the estimated percentage of disposable income devoted to mortgage or rent and consumer debt payments — has dropped steadily and is now at 15.78 percent.
We can take a bit of comfort in these numbers, but there is still reason for concern. Despite signs of prudent behavior, there are two other indicators of lingering vulnerability: a soaring personal bankruptcy rate and inadequate savings.
Back in 2005, George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act, which placed additional requirements on individuals declaring bankruptcy. Under the new rules, bankruptcies plummeted from an average of 1.5 million per year to 600,000 in 2006, but even before the 2008 recession, bankruptcies began to mount again. The banking industry reportedly spent nine years lobbying for the bill, but by 2010, five years after it passed, bankruptcies were back up to 1.5 million per year. With the start of the recovery, bankruptcies dropped slightly in 2011 to 1.36 million. But over a million personal bankruptcies a year is not a sign of financial stability.
According to the Federal Reserve, the personal savings rate hit a low of 1 percent of disposable income in 2005, and as the crisis began, it briefly hit a peak of 8.3 percent. But with the recovery has come renewed spending, and as of August, the savings rate was back down to 3.7 percent.
We are still carrying big debts, our economy is not yet back on track, and we have little saved for the inevitable rainy day. Saving is not even on the radar screen. When was the last time you heard a public figure talk about the virtues of saving, or better yet, propose a program aimed at encouraging saving? In today’s business-friendly, consumer-driven economy, promoting saving would almost be unpatriotic. But as businesses reap the benefits of our unbridled spending, individual consumers pay the price.
So, yes, in the short term there are some encouraging signs, but our troubled relationship with plastic is unchanged. It will take more than a bump in the economic road to get us to establish new spending habits.
Stuart Vyse, a psychology professor at Connecticut College, is the author of “Going Broke: Why Americans Can’t Hold on to Their Money.”
Retailers expect brisk holiday sales
By Rick McAllister
Georgia’s retailers are expecting to have a good holiday shopping season, and we think consumers will be pleased with the values they will be able to find. Consumers have become much more deliberate with their purchases in recent years. Retailers have responded in several ways.
The old saw in retail is that when times are tough, people stop shopping for their “wants” and only buy their “needs.” Times are getting better these days. Retailers have learned to be leaner in many of the same ways.
Over the past few years, most families’ credit card usage has gone down. Consumers are making fewer late payments, and they are generally carrying less debt than they were four years ago. In December 2008, total outstanding revolving credit hit a peak of more than $1 trillion. As of August this year, revolving credit stood at about $850 billion, about the same as two years ago.
That’s a good sign, because it means more families are spending within their means. Over the short term, it has dampened retail sales. Over the long term, it’s a positive trend for retailers because it means future growth is going to be sustainable.
The retail business is extraordinarily competitive. Retailers have been quick to respond to the changing habits of consumers. One widespread response to the more cautious use of credit has been the revival of a very old-fashioned idea: layaway programs. Look for that to be a major trend in holiday sales this year.
Retailers have found themselves working much harder to offer the pricing, quality, value and service that customers demand for their dollars. Whether you’re selling luxury goods or discounts, you have to know where you stand in the marketplace now more than ever.
Retailers generally look at the back-to-school shopping season as an early indicator of what to expect for holiday sales. Most major retailers nationally reported average annual growth in annual same-store sales of between 4 and 5 percent in August. We expect that trend to continue through the end of the year. Georgia retailers will be pleased with their holiday sales. Georgia’s unemployment rate, which is above the national average, will weigh on consumer demand somewhat, so we expect moderate growth.
The calendar is going to make this a better holiday shopping season for retailers because it will be a little longer. Because Christmas is on a Tuesday, and Thanksgiving arrives on Nov. 22, there will be five full weekends and a few more days to shop during the traditional holiday season.
Retailers always staff up for the holidays; customer service has become more important as customers have become more selective about where and how much they spend. If you are planning to do some serious holiday shopping, you should expect to have fun and get great service.
Rick McAllister is president of the Georgia Retail Association.