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It was only 10
days ago when the so-called experts were heralding a big jump in consumer
borrowing as a positive sign for the economy.
"May
Consumer Credit Expands Most in Five Months" (Reuters)
Consumer credit
expanded in May by the most in five months as Americans used their credit
cards more readily, offering hope household spending will help the sputtering
economy.
The Fed also
said credit rose more during April than originally thought.
The data
follows a report on Friday that showed employers hired at a dismal pace in
June, a sign Europe's debt crisis was shifting the economy into low gear.
Most economists think economic growth slowed in the second quarter, when the
pace of hiring fell off dramatically.
The credit data
from May suggests consumers are gaining some confidence after a long stretch
in the doldrums.
"If
sustained, this dynamic would be positive news for consumer spending as a
whole and, ultimately, for job creation," said Dana Saporta,
an economist at Credit Suisse in New York.
However, like
most of what passes for analysis these days, that upbeat assessment had
little to do with economic reality.
As Real Clear Markets notes in
"Americans
Resort to Plastic Safety Nets,"
Americans are
starting to borrow once again, they're doing so at an unexpectedly high
level, but it's for all the wrong reasons.
One of those
reasons, according to Victor Nava and Anthony Randazzo,
has to do with the nature of the obligations that are being taken on.
This added debt
is coming from increased levels of borrowing on revolving lines of credit.
Households are struggling to pay their bills, leading credit card usage
specifically to jump 11 percent in May. Essentially, households are taking on
more debts with high servicing costs - not low rate home and business loans.
The latter, for
the most part, are paid down over time, leading to reduced debt loads and
stronger household balance sheets, while the higher rates and open-ended
repayment structure of credit cards and other revolving debt tends to have
the opposite effect, leaving consumers worse off. Hence, the authors
conclude,
while the
Federal Reserve's recent consumer credit report may appear to paint a rosy picture
of Americans who are spending money, taking out bank loans at a growing rate,
and generally feeling better about the economy, closer inspection suggests a
stagnant economy that is failing to create jobs, and Americans resorting to
their "plastic safety nets" just to get by.
But even if one
takes issue with this assessment, it's not hard to find other evidence that
suggests the debts being racked up now are increasingly a matter of necessity
rather than choice.
A new report
from the Pew Charitable Trust, for instance, detailed by the Huffington Post in "Poorest
Americans Turning To Payday Loans To Afford Food, Electricity,"
reveals that
the
poorest Americans are stringing together multiple high-interest loans each
year just to keep the lights on and food on the table.
According to
the report, 7 out of 10 borrowers use payday loans -- typically short-term,
high-interest cash advances -- to make payments on recurring bills, including
utilities, car payments, food, rent and mortgage
payments. This is contrary to the typical marketing from payday lenders, who
often pitch the loans as quick cash for a onetime cash crunch.
The report's
release comes as other financial woes, like high unemployment and rising
household costs, continue to put economic pressure on many consumers. There
are signs that other kinds of high-cost borrowing, like use of credit cards,
are also being increasingly tapped to pay for everyday items as well.
In contrast,
those at the other end of the economic spectrum, who presumably could afford
to amp up their spending and borrowing if they were
so inclined, are apparently moving in the opposite direction, as Reuters reveals in "AmEx Revenue Misses as Spending Growth Moderates":
Credit card
company American Express Co's second-quarter
revenue marginally missed Wall Street estimates as cardmember
spending growth moderated amid low consumer confidence.
U.S. retail
sales fell in June for the third straight month, the longest run of
consecutive drops since 2008, and consumer sentiment is now at its lowest
level in seven months as Americans take a dim view of their finances and job
prospects.
"Overall cardmember spending rose 7 percent, or 9 percent adjusted
for foreign currency translations. That's slower than the increases we've
seen in the recent quarters," Chief Executive Officer Kenneth Chenault said in a statement.
Cardmember
spending at the company, which focuses on the affluent customer, grew in the
double-digit range for the last nine quarters.
American
Express said spending growth rates slowed across all business lines and all
segments.
The company's
card data is widely held as an indicator of the spending sentiment of the
more affluent consumer, signaling that the weak recovery is taking its toll
across all economic segments.
In sum, while
more borrowing might have been seen as a positive sign in the good bad
old days, that doesn't appear to be the case now.
Michael J. Panzner
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