Tuesday, May 08, 2007

Time for the Credit Card?

Herb Greenberg relates a funny, yet chilling story in his most recent column:
SAN DIEGO (MarketWatch) -- You may have seen that LendingTree commercial with a happy-go-lucky guy named Stanley Johnson, who brags about his big house, his new car and how, "I even belong to the local golf club. How do I do it?" he continues with a big, dumb smile, "I'm in debt up to my eyeballs." Lowering his voice, but still smiling, he adds, "I can barely pay my finance charges." The smile doesn't leave his face as he drives a riding lawn mower, saying, "Somebody help me."

Thanks to easy credit, many Americans have been living well beyond their means. But that credit picture is beginning to change. And when you think about where the U.S. economy might be a quarter or two from now, you have to wonder how many Stanley Johnsons are out there. This isn't the stereotypical subprime borrower, with a spotty credit history and low credit score, but instead people perceived by friends and neighbors to be living the good life, some even sporting good credit scores.
I'm not sure what hard evidence there is for the notion that people with good credit are starting to run into problems with their loans (though Greenberg does related a couple of pretty compelling anecdotes). But I do know that there is plenty of statistical evidence that Americans have recently begun relying on their credit cards more than they had.

Yesterday we had a little-noticed Federal Reserve news release on consumer credit, which noted that consumer borrowing was up substantially in March. But this was only the latest report in what has clearly become a trend. The following picture illustrates.

Consumers typically start borrowing when their income starts falling (as happened in the recession of 2001). So this may be an early indicator that income growth has been slowing.

Alteratively, this new borrowing might simply be covering the long-standing gap between the growth rates of personal income and spending that I highlighted a little while ago. Until recently, it seems many households were covering that gap with mortgage equity withdrawals. Now that house prices are no longer rising, are households simply turning to their credit cards? The story is rather compelling...


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