Sunday, September 21, 2008

Will The Leveraged Consumer Remain Resilient? Analysis of Real Earnings, Spending, Employment & Leverage

With all of this bail out news on Wall Street, I'm wondering how all of it affects the consumer. Will the consumer remain strong during this financial crisis? All of this mortgage bailout talk did not include consumer debt until now. I just read in Bloomberg tonight that "U.S. Treasury Widens Scope of Plan to Buy Bad Debt" (Bloomberg)

"The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset. That may force an eventual increase in the size of the package as Democrats and Republicans in Congress negotiate the final legislation with the Bush administration, analysts said."
As with mortgages, loose lending standards were also applied to credit card debt, lines of credit, auto loans and education loans. It's interesting that the Fed's consumer debt/disposable income ratio hasn't really run out of control, but there is a trend of rising delinquencies and charge-offs at banks holding these consumer credits. With less jobs being created and unemployment rising this could definitely create more write downs in the banking sector, which is probably why the Government included them in the bailout. Plus consumer debt is securitized just like mortgages, and look what happened to Citigroup last quarter, Citi loses $176m on credit-card securitizations. "Citigroup Chief Financial Officer Gary Crittenden said North American credit card losses could exceed historical peaks, and consumer credit costs might have a "meaningful" impact on results for the rest of the year". Also as you can see from the charts below, real personal income has been falling due to inflation, mainly because high gas prices and food costs have squeezed the consumer. So again, from here it all depends on how resilient the consumer is and how fast these banks get repaired when determining the fate of the economy going forward.

Personal Income & Spending (Source:

Real Avg. Weekly Earnings (Source:

CPI YoY% (Source:

Non-Farm Payrolls (Source:

Unemployment Rate (Source:

Credit Card Deliquencies (Source:

Credit Card Net Charge-offs (Source:

Revolving Consumer Credit (Source:

The Bloomberg Edge: Credit Card Debt Slowdown (9/19/08)