Consumer Credit Market Perceptions Fall

GALLUP NEWS SERVICE

PRINCETON, NJ -- Last month, the Experian-Gallup Personal Credit Index (PCI) increased, foreshadowing the September surge in consumer confidence and investor optimism in response to declining gas prices at the pump. In the October poll, conducted Sept. 18-24, the PCI gave up its September gains, suggesting that the deteriorating housing sector and the high level of consumer debt may be offsetting the benefits of lower gas prices in the eyes of the average American consumer.

Many consumers continue to believe that now is a bad time to borrow. At the same time, one in three lower-income consumers are worried about making their monthly payments.

The Personal Credit Index Gives Up Last Month's Gains

The PCI increased by eight points in September, reaching 92 -- its highest level since March. The much-improved credit market perceptions were largely attributable to sharply falling gas prices at the pump and the expectation that the Federal Reserve Board had finally finished raising interest rates.

In October, the PCI fell seven points to 85 -- essentially giving up September's gains. In part, this drop in consumer credit-market perceptions may be because of slowing sales, growing inventories, and declining prices in many of the nation's housing markets. To the degree that surging housing prices had a significant "wealth effect," making many consumers feel better about their personal balance sheets, declining prices may well be having just the opposite effect.

Both Dimensions of the PCI gave up their prior month's gains. The Present Dimension is at 34, down three points from September. The Future Dimension is at 51, down four points.

A Bad Time to Borrow

In the October poll, 37% of consumers say now is a bad time to borrow more money while only 15% say it is a good time. In September, these percentages were essentially the same: 38% said "bad time" and 14% said "good time." For the third quarter as a whole, 38% of consumers said it was a bad time to borrow.

During the third quarter, the percentage of consumers saying "now is a bad time to borrow" was highest in the East and lowest in the South, although all regions were in the 35% to 43% range.

Over the same period, 30% of those having incomes of $75,000 or more a year said it was a bad time to borrow. A substantially higher 41% of those with incomes between $40,000 and $74,999 held this same opinion, while 45% of those with annual incomes of less than $40,000 said it was a bad time to borrow additional money.

Trouble Making Monthly Payments

In the October poll, 20% of consumers say they are very or somewhat worried about keeping up with their monthly payments. This is essentially the same as a month ago, as well as for the quarter as a whole, when 19% voiced similar concerns.

During the third quarter, 16% of consumers in the West said they were worried about making their monthly payments. In all other regions, 20% of consumers voiced these worries.

As might be expected, the percentage of consumers worried about making their monthly payments varies significantly by income. In the third quarter, one in three (32%) of those with incomes of less than $40,000 annually said they were worried about making their monthly payments. Only half as many (17%) of those having annual incomes between $40,000 and $74,999 voiced similar worries, compared with just 8% of those making $75,000 or more a year.

A Change in Spending Patterns?

Over the past several years, lower- and middle-income consumers have taken the brunt of the negative forces within the U.S. economy. These consumers have seen their real disposable incomes squeezed as wages have been flat and the price of gas at the pump has soared. In this regard, it should not be surprising that one in three consumers making less than $40,000 annually tell Gallup they are worried about being able to make their monthly payments.

On the other hand, the income squeeze has been eased for consumers owning homes and other real estate investments, as soaring real estate prices have created significant wealth gains. These consumers have taken advantage of several years of low interest rates to monetize their housing gains. The net result of today's income squeeze has been a sharp decline in spending on non-essentials by many lower- and middle-income consumers, but essentially no letup in spending by homeowners and upper-income households.

However, current economic trends could lead to a significant shift in these spending patterns. Plunging gas prices at the pump should lead to an increase in spending by lower- and middle-income consumers -- good news for lower-end retailers like Wal-Mart -- particularly once they believe the decline will be maintained over time. Of course, recent Gallup Polls show 4 in 10 lower-income consumers (those earning less than $30,000 annually) are not convinced that the price drop will last until the end of the year, and 4 in 10 consumers overall believe that the Bush administration has been manipulating gas prices prior to the November elections.

In sharp contrast, declining housing values may have a "negative wealth effect" as far as homeowning consumers are concerned. In addition to stopping their habit of using their home equity as a piggy bank, these consumers may actually slow spending even more in an effort to reduce their overall debt. This would not be good for middle- to upper-end retailers.

The drop in the PCI and current consumer borrowing perceptions suggest the early signs of a housing-induced "negative wealth effect" that may be taking hold with many U.S. consumers. Whether this is real or simply a chimera may well determine whether the Fed achieves its much-ballyhooed "soft landing" for the U.S. economy in 2007.

Survey Methods

Results for the Experian-Gallup Personal Credit Index poll are based on telephone interviews with 1,018 adults, aged 18 and older, conducted Sept. 18-24, 2006. For results based on the total sample of investors, one can say with 95% confidence that the maximum margin of sampling error is ±3 percentage points. Quarterly results are based on 3,032 interviews conducted during July, August, and September. For results based on the total quarterly sample, one can say with 95% confidence that the maximum margin of sampling error is ±2 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.