Abstract: Consumer credit: No big surge soon The cup of consumer credit heading into 1992 is half empty by some estimates and half full by others. While the worst appears to be over, consumer borrowing is down. In fact, notes Charles Luckett, a senior economist with the Federal Reserve, demand for consumer credit is declining, as it was during most of 1991. The rate of decline of consumer debt outstanding isn't excessive - it's been about 1.5% or 2% on average, says Luckett. that's a lot different from 1984 and 1985 when the business cycle was in an upswing and credit grew 17% or 18% annually, says Luckett. In the first article of this report - the results of a national credit survey - 57% of all responding bankers said demand for consumer installment credit was weak; 40% said it was moderate; and 2% described it as strong. Demand for home equity credit showed similar patterns: 57% said it was weak; 34% said it was moderate; and 4% labelled it strong. Regional variations were apparent, but the swings were surprisingly small. The slump in borrowing doesn't come as a surprise to bankers who have lived through previous recessions. In fact, the current recession, point out some bank economists, is relatively mild and largely confined to certain geographic regions, sparing others at least for now. Later, not sooner. The upside to the situation is that consumers are now focusing their efforts on reducing debt burdens accumulated in the past several years. the economy does turn around, goes the theory, consumers will be in a better position to finance mortgages, new cars and other large-ticket items they have held off from buying. We will probably see more significant increases in consumer credit during the second half of 1992, predicts Sung Won Sohn, senior vice-president and chief economist at Norwest Corp., Minneapolis, and chairman of ABA's Economic Advisory Committee. A major factor in the delay, says Sohn, is the concentration of service jobs in the job market and a reduction in manufacturing jobs, which typically pay more than those in the service sector. Per capita income, which affects consumer borrowing power, is not going in the right direction, says Sohn. In the meantime, banks are working overtime to stem the flow of losses associated with delinquent loan payments on credit card debt and instalment loans, declining real estate/mortgage values, and an alarming increase in the rate of personal bankruptcy filings. Surging cards. Consumers who are in a position to borrow are being very cautious, and that level of caution will last for a while, according to Sohn. At the same time, many who have accumulated debt are continuing to borrow in order to maintain their standard of living, adds Sohn. When they do that, their credit quality deteriorates, and delinquency rates go up. That phenomenon can be traced in part to the increase in credit card outstandings, which has flown in the face of lower demand for other kinds of consumer credit. Through the course of the recession, retail sales were essentially flat, says William F. Treacy, chief economist at MNC Financial Corp., Baltimore. Yet credit card outstandings were increasing at double-digit annual rates through March and began to moderate in April. The implication is that people were using available credit card balances to supplement their ordinary income and to keep their level of purchases going. Treacy says the trend is consistent with the sharp increase in credit card delinquencies through the second quarter of 1991. Competitive pressure to make consumer loans is likely to accelerate as commercial lending opportunities continue to be scarce. Given that scenario, even a modest increase in consumer credit demand would include proportionately riskier loans. But banks would rather assume the risk on consumer loans, which are generally collateralized, than on corporate loans with their much greater exposures. …
Publication Year: 1992
Publication Date: 1992-01-01
Language: en
Type: article
Access and Citation
Cited By Count: 1
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot