August 13, 2007

Are American Consumers' Views of the Credit Markets Shaken?

New early August poll shows credit crunch spreading even before events of late last week
by Dennis Jacobe

GALLUP NEWS SERVICE PRINCETON, NJ -- Last week, the Fed injected more money into the financial system than it has at any time since Sept. 14, 2001. In both instances, monetary authorities did so in an effort to maintain orderly financial markets. However, this time it was the failure of the system to contain the fallout of the subprime mortgage debacle -- not terrorist attacks -- that created a global liquidity crunch and unruly financial markets. During the months ahead, it's likely a lot more will be heard about the ramifications of last week's events for both the financial markets and the U.S. economy. Significantly, a new Experian/Gallup Personal Credit Index (PCI) poll conducted during the first week of August seems to confirm that financial market conditions had already begun to negatively affect consumer perceptions of the credit markets even before the global liquidity crunch surfaced late last week. As lenders pull back even more in response to their liquidity concerns, the current consumer credit crunch is likely to intensify. As a result, the question may no longer be whether consumers will pull back on their use of credit and their overall spending, but instead, how severe the consumer spending pullback will be in the face of an old-fashioned consumer credit crunch -- one in which the actual availability of credit may play a bigger role than the interest rate the borrower must pay. Consumer Credit Market Perceptions Take a Plunge Consumer perceptions of the consumer credit markets plummeted in early August, as the PCI fell by 13 points to 82. The PCI started the year by reaching its highest point to date -- 105 in both January and February. It has fallen 23 points since then, and now stands at its lowest point since May 2006. The PCI was 100 at its inception in February 2005. The Present Dimension, reflecting consumers' perceptions of current credit-market conditions, fell 9 points to 31 in August -- down from 40 in July. This is the lowest point for this dimension of the PCI since November 2006, when it stood at 30, and is 2 points above its all-time low. The Future Dimension of the PCI, which reflects consumers' expectations for credit-market conditions in the future, also declined, dropping 4 points to 51 in August. This is its lowest level since September 2006 and is 13 points below its February 2007 peak of 64.

Not a Good Time to Borrow In August, 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 this is a "somewhat" or "very good time" to borrow fell to 13% in August -- down from 15% in July and 17% in June, and its lowest level since the PCI's inception. In sharp contrast, the percentage of consumers saying now is a somewhat or very bad time to borrow increased to 41% from 34% in July.

The Consumer's Willingness to Borrow and Spend Over the past couple of decades, consumer attitudes about saving and borrowing have changed. While many older and upper-income Americans save substantial amounts of money on a regular basis, many Americans have virtually no savings. Even more importantly, many of those families with little or no savings tend to treat credit as a source of emergency funds.

Obviously, when unexpected expenses occur and people have no savings, some form of credit is their only option. The subprime mortgage debacle has already caused lenders to pull back on their lending, resulting in a consumer credit crunch. In fact, nearly one in five consumers (19%) report that someone close to them has been turned down for credit they have applied for during the past three months. Further, 46% of consumers say they would feel "somewhat" or "very uncomfortable" making a major purchase such as a home, a car, or major appliances over the next three months. Given the global liquidity squeeze and the likelihood that it will make lenders even more hesitant to lend, it seems probable that the current consumer credit crunch will intensify in the months ahead. In turn, as consumers who see credit as their best potential source of emergency funds realize their access to credit is being reduced, they can be expected to become even more cautious about borrowing -- and may even look for ways to build some savings. The most likely result is an old-fashioned credit crunch. At this point, few people seem to be linking events in the financial markets directly to consumer spending and the probability of recession. In the days ahead, however, all that may change as the possibility of a traditional consumer credit crunch begins to take hold. Don't be surprised if the calls for federal bailouts and for the Fed to lower interest rates build in volume. Survey Methods

Results are based on telephone interviews with 1,001 adults, aged 18 and older, conducted Aug. 1-7, 2007. For results based on this sample, one can say with 95% confidence that the maximum margin of sampling error is 3 percentage points. In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.