GALLUP NEWS SERVICE
PRINCETON, NJ -- Consumer credit market perceptions are essentially unchanged according to the latest Experian/Gallup Personal Credit Index (PCI) poll conducted Oct. 17-22, 2006. Despite declining gas prices at the pump, many consumers continue to feel this is not a good time to borrow. Will this hesitancy to increase their debt and a negative "wealth effect" associated with declining home prices mean consumers will spend less on big-ticket items this Christmas season?
The Personal Credit Index Shows No Improvement
Plunging gas prices, a halt to the Fed's series of rate increases, and an overall increase in consumer confidence would normally suggest a significant improvement in consumer credit market expectations. However, the new Personal Credit Index (PCI) shows that is not the case as it registered an 86 for November -- essentially the same as the 85 of October. This is higher than the 74 the PCI indicated a year ago, but still six points below its September level of 92.
Both dimensions of the PCI were essentially unchanged this month. The Present Dimension is at 34 -- the same as last month. The Future Dimension is at 52, up one point from last month.
A Bad Time to Borrow
The November PCI shows 38% of consumers say it is a "Bad time" to borrow money and 17% who say it is a "Good time" to do so. This isn't much different than the 37% of consumers who last month said now is a "Bad time" to borrow and the 15% who said it is a "Good time" to borrow more money. In fact, over the third quarter as a whole, 38% of consumers said it was a "Bad time" to borrow and thus, increase debt.
Declining Home Prices
About one in five consumers tell Gallup in the new PCI survey that they believe that average home prices in their communities will decline over the next 12 months. This is twice the number who felt this way last month. Although the PCI survey was conducted prior to the release of the new house price data released late last week, it is fully consistent with the sharp drop in new house prices recorded during September.
A Change in Spending Patterns?
In part, this lack of improvement in consumer credit market perceptions may be due to slowing sales, growing inventories, and declining prices in many of the nation's housing markets. Surging home prices had a significant "wealth effect" on many consumers making them feel better about their personal balance sheets and their much-improved net worth. In turn, this feeling of added wealth combined with historically low interest rates stimulated an added willingness on the part of many consumers to not only spend more, but also, to buy more big-ticket items and take on the new debt associated with them.
In sharp contrast, today's declining housing values may have a "negative wealth effect" as far as homeowners are concerned. These consumers may not simply stop their habit of using their home equity as a "piggy bank." They may actually slow their spending -- particularly on big-ticket items -- in an even greater effort to reduce their overall debt.
Current consumer borrowing perceptions, as reflected by the PCI, suggest that we may be seeing the early signs of a house price-induced negative wealth effect taking hold with many U.S. consumers. Whether this perceived decline in consumer net worth and today's higher interest rates will combine to slow consumer spending on big-ticket items this Christmas season is debatable. The positive spending impact of increasing house prices took some time to have an impact on consumer spending -- there could be a similar lag on the downside. Further, Gallup's recent holiday spending survey shows a sharp increase in consumer spending intentions this holiday season. Regardless, the impact of falling home prices on the U.S. economy and consumer spending provides reason for concern in the months ahead.
Survey Methods
Results for the Experian/Gallup Personal Credit Index poll are based on telephone interviews with 1,022 adults, aged 19 and older, conducted Oct. 17-22, 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 sample of investors, 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.
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