GALLUP NEWS SERVICE
PRINCETON, NJ -- During recent weeks, fears have grown that the housing market recession and attendant sub-prime mortgage market debacle will spread, impacting the markets for prime mortgage loans and, maybe, even consumer credit as a whole. News that General Motors may take a $1 billion charge to cover its bad sub-prime mortgage loans has heightened these fears. And, while U.S. Treasury Secretary Henry Paulson's assurance that the weakened housing market and the related credit issues in certain types of mortgages are "largely contained" -- i.e., will not have a major impact on the U.S. financial sector -- just the fact that he feels the need to address this issue while traveling in Asia shows the significance of these mortgage market concerns on Wall Street.
All of the recent gyrations in the equity and bond markets and policymaker responses, however, may be masking the real significance of recent events in the sub-prime mortgage market. A new Experian/Gallup Personal Credit Index (PCI) poll shows consumer optimism about the U.S. credit markets plunged in early March. The key question: Is this a sign that consumers are starting to see the beginnings of an old fashioned consumer borrower credit crunch?
The PCI Takes a Plunge
Consumer perceptions of the credit markets fell sharply in March as the Experian/Gallup Personal Credit Index (PCI) plunged 15 points from 105 in January and February to 90 in March. This is the lowest level for the PCI since November 2006, when it stood at 83. The PCI stood at 100 at its inception in February 2005.
Consumer credit perceptions declined along both dimensions of the PCI. The Present Dimension fell 5 points to 36 -- down from 41 in February. The Future Dimension fell 10 points to 54 in March -- down from 64 in February.
Is a Consumer Borrower Credit Crunch Underway?
Last week, the U.S. Labor Department reported the weakest job growth in two years, with the economy creating an estimated 97,000 jobs in February. Although the jobs data were generally well received on Wall Street, it does not reflect economic strength. Add February's generally weak retail sales, the slowdown in the automotive industry and manufacturing, and conditions in the nation's residential real estate markets, and there are reasons to be concerned about the overall U.S. economy as 2007 unfolds.
Still, whether the country avoids former U.S. Federal Reserve Chairman Alan Greenspan's proclamation that the nation faces a one in three chance of a recession later this year may depend on how the sub-prime lending issue affects overall consumer credit availability. Last week, federal regulators ordered Fremont Investment & Loan to tighten its loan policies. At the same time, current Federal Reserve Chairman Ben Bernanke noted in a speech to a banking conference in Hawaii that the $1.4 trillion combined investment portfolio of Fannie Mae and Freddie Mac presents a systemic risk to the broader economy and should be curtailed.
If the regulators and the banks they regulate are beginning to pull back on the easy availability of consumer credit seen during recent years, something of an unusual credit crunch could take place. In fact, the sharp drop in the PCI for March may signal that the start of such a consumer credit crunch is already underway. In turn, if tighter consumer credit conditions are now being implemented, then the odds of a recession may even surpass those suggested by Greenspan just a few weeks ago.
Survey Methods
Results for the Experian/Gallup Personal Credit Index poll are based on telephone interviews with 1,005 adults, aged 18 and older, conducted March 1-6, 2007. For results based on the total sample of consumers, one can say with 95% confidence that the maximum margin of sampling error is ±3 percentage points.
The Gallup World Poll gives you the power to know - and act on - what the world is thinking.