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Consumer Credit Crunch Already Underway

September poll shows credit crunch impact varies by age, income, geography

by Dennis Jacobe

PRINCETON, NJ -- Representatives of the Federal Reserve System were out in force last week talking about the potential impact of current financial sector dislocations on the overall U.S. economy. In this regard, Federal Reserve Board Governor Frederic Mishkin pointed out last Monday night (Sept. 10) that contrary to prior perceptions, revised Labor Department figures show private payroll growth averaged 70,000 new jobs over the past three months -- less than half of the 165,000 new jobs averaged during the last half of 2006. In turn, this suggests that the job slowdown has been underway for several months. Of course, it is also a tacit admission on the part of the Fed that monetary policy is probably trailing economic reality on Main Street -- not leading it.

Significantly, new Experian/Gallup Personal Credit Index (PCI) Poll data for early September -- as well as that collected over the past three months -- suggests that contrary to popular perceptions, the consumer credit crunch has also been underway for several months. In particular, this seems to be the case for many younger- and lower-income consumers as well as those in the Midwest.

Not a Good Time to Borrow

In September, more than three times as many consumers asserted that now is a "bad time" to borrow as thought it is a "good time" to do so. The percentage of consumers saying now is a "somewhat" or "very bad" time to borrow is now 42% -- essentially the same as the 41% in August and up from the 34% in July. The percentage of consumers saying this is a "somewhat" or "very good time" to borrow is now 12% -- nearly the same as the 13% in August, but down from 15% of July, and its lowest level since inception of the PCI in February 2005.

Consumers Are Being Turned Down for Credit

Combined data for the July through September surveys finds about one in six consumers (18%) saying they know someone close to them who has been turned down for credit they applied for during the past three months. Significantly, one in three of consumers in the 18 to 29 age bracket say they know someone turned down for credit. This compares greatly to 22% of those 30 to 49 years of age, 13% of those 50 to 64 years of age, and 5% of those 65 years or older who say they know someone who has been turned down for credit.

Nearly one in four consumers (23%) making less than $40,000 a year say they know someone who has recently been turned down for credit compared to 19% of those making $40,000 but less than $75,000 annually, and 14% of those making $75,000 a year or more. One in five consumers in the South know someone recently turned down for credit compared to 18% in the Midwest and 16% in both the East and West.

Consumers Know Those Going Broke and in Foreclosure

In September, 12% of consumers said they knew someone who had filed for bankruptcy or who had experienced a foreclosure during the past three months. Not surprisingly, given economic trends of the past few years, many more consumers in the Midwest (19%) know someone experiencing bankruptcy or foreclosure compared to 11% in the West, 10% in the South, and 8% in the East.

Thirteen percent of consumers 18 to 29 years of age say they know someone who has filed for bankruptcy or who has gone into foreclosure during the past three months. Fifteen percent of those 30 to 49 years of age, 13% of those 50 to 64 years of age, and 5% of those 65 years or older say the same.

One in 10 consumers making less than $40,000 a year say they know someone who has gone into bankruptcy or foreclosure recently. This is compared to 14% of those making $40,000 but less than $75,000 annually, and 16% of those making $75,000 a year or more.

The Consumer Credit Crunch Will Intensify

Over the past couple of years, the general perception has been that consumers have shown tremendous resiliency in the sense that they have continued to spend -- even as gas prices have surged and consumer confidence has plummeted. Of course, further analysis shows that while lower- and moderate-income consumers have been squeezed and have cut back on their other spending when gas prices have surged, these spending cuts have been more than offset by middle- and upper-income consumers who have been doing quite well in terms of income and wealth during recent years, and have continued to borrow and spend.

What recent polls reveal is that many lower- and middle-income consumers are already experiencing an old fashioned credit crunch as their access to credit has been reduced. Similarly, many Midwest consumers have experienced economic dislocations and, thus, have already begun experiencing bankruptcies and foreclosures. However, the financial distress of recent weeks seems likely to take the intensity of the current consumer credit crunch to a new level. In turn, this suggests that many more consumers are likely to know someone close to them who has been turned down for credit or experienced a bankruptcy or foreclosure and are likely to pull back on their spending during the months ahead.

While the Fed governors will have a lot of other issues on their minds when the FOMC meets tomorrow (Sept. 18) -- ranging from issues concerning the ability of changes in the federal funds rate to impact credit availability in the current environment, to the future value of the dollar and the concept of moral hazard -- they should also recognize that they are behind economic reality on Main Street -- not only in terms of jobs, but also consumer credit availability. They should also acknowledge that the immediate psychological impact of monetary policy on the domestic economy right now may be much more important than its intermediate-term real economic effects. In turn, these realities suggest that the Fed needs to get out ahead of the current Main Street economic reality -- and not wait for that reality to be reflected in the national economic data.

Survey Methods

Results for September are based on telephone interviews with 1,013 adults, aged 18 and older, conducted Sept. 1-9, 2007. For results based on the total sample of respondents, one can say with 95% confidence that the maximum margin of sampling error is ± 3 percentage points.

Results for July, August, and September 2007 are based on telephone interviews with 3,029 adults, aged 18 and older. For results based on the total sample of respondents, one can say with 95% confidence that the maximum margin of sampling error is ± 2 percentage points.


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