Four in 10 Say Now Is a Bad Time to Borrow

GALLUP NEWS SERVICE

PRINCETON, NJ -- Earlier this week, there were a number of good economic reports suggesting that the U.S. economy not only was strong during the first quarter but did surprisingly well in April. During March, personal income and consumer spending was better than expected, while overall construction activity hit a record high. In April, manufacturing was stronger than expected, as were retail sales. The Labor Department is expected to report strong job growth for April.

In sharp contrast to all this good economic news, the May Experian/Gallup Personal Credit Index (PCI) -- designed to provide a "window" into consumer credit-market perceptions -- fell to its lowest level since its inception in March 2005. It also shows a record high percentage of consumers saying now is a "bad time" to borrow. Significantly, the new PCI survey was conducted April 20-27, during the most recent surge in gas prices at the pump.

The Personal Credit Index Declines Again

Consumers became more negative about their credit situations this past month, as the PCI declined by 10 points to 74. Over the past two months, the PCI has fallen 19 points, and is at its lowest level since its inception (it was also at 74 in November 2005). The PCI was set at 100 when it began in March 2005.

The PCI's decline comes equally from concerns about the present and concerns about the future. The Present Situation Index declined by five points to 31, while the Future Situation Index also declined by five points to 43.

Bad Time to Borrow

Forty-two percent of consumers say now is a "bad time" to borrow more money. This is up from 35% who said it was a bad time a month ago and 32% who said it was a bad time to borrow a year ago. Only 15% of consumers say now is a good time to borrow, down from 27% in May 2005.

Dramatic Change in Credit Market Perceptions

The dramatic change in consumer perceptions of the credit markets over the past year can be more clearly seen if the percentage of consumers saying now is a bad time to borrow is subtracted from the percentage saying it is a good time. In May 2005, 27% of consumers said it was a good time to borrow and 32% said it was a bad time, for a difference of -5 percentage points. By May 2006, this difference had reached -27 percentage points.

Have Gas Prices Reached a Tipping Point?

During the week of March 27, gas prices at the pump averaged $2.50 a gallon, according to the federal government's Energy Information Administration. One month later, during the week of April 24, the price had increased by 41 cents to $2.91 a gallon. At this point, it is possible that some on Wall Street will use the recent rash of good economic numbers to argue that consumers will simply keep spending even as gas prices hover around the $3 per gallon mark. In fact, the continued economic momentum of April and signs of increasing labor costs have many fearing inflation and higher interest rates.

On the other hand, three in four consumers (76%) say the country's energy situation is having a major impact on the economy, according to the Experian/Gallup PCI poll. Eight in 10 say that as the cost of energy has risen across the country, they have felt the need to conserve on their use of energy. Two in three say they "personally" have felt the need to cut back on other discretionary spending. In fact, half of all consumers say higher gas prices this year compared to last year have caused them financial hardship, and one in three of those who have experienced hardship say gas price increases have caused them a "great deal" of hardship.

Gallup's economic data show that the surge in gas prices at the pump has had a significant impact on consumer perceptions. The question is whether this change in consumer perceptions will actually change consumer behavior. It takes time for consumers to change their behavior in response to such a sudden price increase; then, there is an added lag as changes in consumer behavior affect the overall economy. At this point, last week's increase in gasoline inventories with no corresponding increase in consumer demand may be a faint sign that at $3 a gallon, the country has reached a tipping point at which higher gas prices result in a drop in demand.

More importantly, the declining PCI and the increasing number of consumers who say now is a bad time to borrow suggest that increasing interest rates may be combining with surging gas prices to produce a consumer spending pullback in the months ahead. When the Federal Open Market Committee meets next week (May 10), it is almost certain to increase its benchmark interest rate for the 16th consecutive time, to 5%. Before it signals additional increases, however, it may also want to consider whether, as the PCI suggests, the current economic data are more a reflection of the past than of the future.

Survey Methods

Results for the Experian/Gallup Personal Credit Index poll are based on telephone interviews with 1,008 adults, aged 18 and older, conducted April 20-27, 2006. For results based on the total sample of investors, one can say with 95% confidence that the margin of sampling error is ±3 percentage points. In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.