Consumer health better, but remains fragile

The Federal Reserve said Monday (Aug. 15) that consumer credit during the second quarter showed a “modest increase,” with an Arkansas economist and a Fort Smith banker saying consumer health remains fragile.

A “Household Debt and Credit Report” from the Federal Reserve Bank of New York showed evidence of a “modest increase in the willingness of consumers to borrow and banks to lend.” The second quarter report mirrored the minor improvements seen in the first quarter.

"Outstanding consumer debt remained essentially flat, down just $50 billion, in what was basically a repeat of the previous quarter. This is more evidence that the pace of consumer deleveraging that began in late 2008 has slowed," Andrew Haughwout, vice president in the Research and Statistics Group at the New York Fed, said in the statement. "During the next few quarters we will gain a better understanding of whether this is a permanent or temporary break in the decline of total outstanding consumer debt."

Following the collapse of the housing bubble in late 2007 and early 2008, individuals and businesses began to reduce their debt — deleverage — by drastically reducing spending and boosting savings. Both actions, compounded by the unwillingness or inability of banks to lend, reduced economic activity that resulted in a deep recession with high unemployment levels that continue to plague the economy.

“That’s why this Fed report is so important. … Consumers are starting to come back,” said Jeff Collins, an economist based in Northwest Arkansas who helps produce The Compass Report for The City Wire.

Collins also said language from the Fed indicates how welcome “flat” economic news has become.

“When flat is good, you know it’s been bad,” Collins said.

Highlights of Monday’s Fed report included:
• Mortgage and home equity lines of credit both fell by $20 billion;

• Consumers’ non-real estate indebtedness fell by $10 billion (0.4%) and now stands at $2.28 trillion, 9.5% below its fourth quarter 2008 peak

• Credit card limits increased for the second consecutive quarter by $60 billion, or about 2%, and open credit card accounts jumped by 10 million, to 389 million;

• Credit inquiries within the last six months — an indicator of consumer demand for new credit — bounced back in the quarter after having fallen slightly in the first quarter; and,

• Delinquent and seriously delinquent balances remain 15% below year-ago levels.

The report also said new foreclosure notices were down 22.8% from the first quarter. However, some in the housing sector say the foreclosure declines are more a function of paperwork delays and banks staggering foreclosed properties back into the market than a function of improving housing sector conditions.

Sam T. Sicard, executive vice president of First National Bank of Fort Smith, said the report also indicates how much improvement remains.

“The Fed’s release of Consumer Debt statistics indicates continued gradual improvement in the financial condition of the American consumer. However, household debt as a percentage of household income still remains well above long-term historical averages,” Sicard noted.

Collins and Sicard both noted that uncertainty from political leaders in Washington is not helping to improve consumer and business confidence.

“When coupling high existing consumer debt levels and a very unstable economic environment,  this will continue to suppress demand for consumer credit and consumer spending in the near future,” Sicard said. “Fortunately, debt levels as a percentage of income in the Fort Smith region do not have as far to fall to reach long-term historical averages.”