Ahead of the Bell: Consumer Credit

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Ahead of the Bell: Consumer Credit
Released on 9/10/07 For Jul 2007   3:00ET

Consensus $7.0B

Government data due out Monday is expected to show that Americans racked up debt at a slower rate in July than the prior month amid higher gasoline prices and a weak housing market.

According to a consensus estimate of Wall Street economists surveyed by Thomson/IFR, a Federal Reserve report due out Monday will show consumer borrowing increased $7 billion in July.

In June, consumer credit rose $13.2 billion at an annual rate of 6.5 percent, double what economists had expected and pushing consumer debt outstanding to a record $2.46 trillion.

In May, consumer borrowing increased by an even larger annual rate of 7.9 percent, or $16 billion.

In the monthly report, the Fed measures non-revolving credit, which is used to finance cars, vacations and education, among other things, and revolving credit, primarily credit cards. But the measure does not include mortgages or other loans secured by real estate.

Analysts say consumers have been forced to use credit cards more because of the difficulty in getting home equity loans and other types of mortgage-related financing.

June s increase was led by an 8.4 rate of increase for revolving credit, while non-revolving credit, including auto loans, rose at a 5.3 percent rate, same as in May.
Reading the consumer s state of mind is a challenging enterprise for economists and Wall Street traders right now.

While the New York-based Conference Board said consumer confidence hit a six-year high in July, it wasn t reflected in retail sales, which were sluggish as cautious consumers paid more at the gas pump and saw their home values continue to decline.

Analysts also said the disappointing sales could be attributed to a lack of appealing new products.

The International Council of Shopping Centers-UBS reported same-store sales were up 2.6 percent last month, compared with the 3.9 percent increase in the year-ago. Same-store sales, or sales at stores open at least a year, is a key indicator of retailer performance since it measures growth at existing stores rather than newly opened ones.

Despite slow sales, some companies beat analysts expectations in July, including Wal-Mart Stores Inc., which posted a 1.9 percent same-store sales gain, and Target Corp., which reported a 6.1 percent gain.

However, all automakers, except for Nissan Motor Co., reported that sales declined in July from the year-ago ago. General Motors Corp. s sales declined 22.3 percent compared with July 2006, while Ford Motor Co. s sales fell 19.1 percent year over year.

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Growth in consumer credit can hold positive or negative implications for the economy and markets. Economic activity is stimulated when consumers borrow within their means to buy cars and other major purchases. On the other hand, if consumers pile up too much debt relative to their income levels, they may have to stop spending on new goods and services just to pay off old debts. That could put a big dent in economic growth.

The demand for credit also has a direct bearing on interest rates. If the demand to borrow money exceeds the supply of willing lenders, interest rates rise. If credit demand falls and many willing lenders are fighting for customers, they may offer lower interest rates to attract business.

Financial market players focus less attention on this indicator because it is reported with a long lag relative to other consumer information. Long term investors who do pay attention to this report will have a greater understanding of consumer spending ability. This will give them a lead on investment alternatives.

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